Spot, futures and leverage
Explaining the difference between buying spot, futures contracts, and leverage; how leverage relates to liquidation; and when not to use leverage, with a worked example.
In a spot trade you buy the asset directly; on an exchange it sits in the exchange’s custody account until you withdraw it to your own wallet. A futures contract is an agreement on the asset’s future price; you take a position on the price move without owning the asset. Leverage means opening a large position with a small margin, and it magnifies both gains and losses by the same factor.
Why it matters
Most beginner losses come not from the instrument itself but from misunderstanding leverage. The silent second half of “I’ll make 10x with 10x leverage” is “a 10% adverse move wipes me out.”
Spot, futures, and a leveraged position
| Spot | Futures | Leveraged | |
|---|---|---|---|
| Own the asset | Yes | No (contract) | No (on margin) |
| Liquidation risk | None | Yes | High |
| Maximum loss | Amount invested | Depends on margin | All margin, quickly — on some products more than the margin |
| Complexity | Low | Medium | High |
Example position
| Margin | 1,000 units |
|---|---|
| Leverage | 5x |
| Position size | 5,000 units |
| 2% move in favour | +100 units (10% of margin) |
| 2% move against | −100 units (10% of margin) |
Leverage turns a small price move into a large change relative to your margin. The same percentage multiplies both profit and loss fivefold.
How leverage relates to liquidation
- Leverage
- Position size relative to margin (e.g. 5x, 10x).
- Liquidation distance
- The approximate adverse move that consumes your margin.
Should I use leverage?
Before opening a position, ask yourself:
- I have not defined my risk even on spotDo not use leverage; learn risk management and your invalidation point first.
- I cannot calculate my liquidation levelDo not use leverage; you cannot manage a risk you cannot see.
- I have written down risk, stop, and maximum lossStill start with low leverage and keep total risk small.
Regulators stress that leveraged and futures trading can cause faster and larger losses than the amount invested. Leverage is not a gain accelerator but a risk multiplier.
Once you see the maths of leverage, look at how the same logic plays out in currency markets. Move on to Forex / FX.