Imagine walking into a market with 10inyourpocket.Youspotacrateofapplesthatyoubelievewilldoubleinpricebytomorrow.But10 in your pocket. You spot a crate of apples that you believe will double in price by tomorrow. But 10 only gets you a handful. Now, what if someone offered you 90extrasothatyoucouldtradewith∗∗90 extra so that you could trade with **100** worth of apples instead? You’re still only risking your original 10,butifyouarecorrectandapplesgoup,yourprofitiswaybigger.Ifyouwereright,yousell,repaytheloan,andkeepthegains.Butifapplesfalltoomuchyouloseyour10, but if you are correct and apples go up, your profit is way bigger. If you were right, you sell, repay the loan, and keep the gains. But if apples fall too much you lose your 10, and the lender grabs the apples before the loss gets worse. That’s leverage trading works. You are using borrowed capital to open a bigger position than your wallet could afford on its own, hoping to get more profits, but you are risking faster losses.

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What Is Leverage Trading

Leverage trading is a trading strategy where you borrow more money than you have to increase your trading position beyond what your capital alone would allow. Leverage trading amplifies both potential profits and losses. If you borrow 10X your initial capital, your losses will compound just as quickly as your gains.

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How Leverage Trading Works

Let’s say you have $100 worth of USDC.
  • You open a 5x leveraged trade on ETH.
  • This means you’re now trading with $500 worth of ETH — 5 times your actual money.
  • The platform lends you the extra 400,usingyour400, using your 100 as collateral.
If ETH goes up just 10%, your position grows to $550.
  • You repay the $400 loan.
  • You walk away with 150—a50150 — a 50% return on your original 100.
But… If ETH drops 10%, your position shrinks to $450.
  • You still owe $400.
  • Now you’re left with $50 — you just lost half your money.
If it drops far enough, the platform will auto-liquidate your trade to make sure it gets back what you borrowed. That’s when you lose it all.

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Terms Associated With Leveraged Trading

There are some terms associated with leveraged trading that you’ll find around. Let’s overview them:

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Long vs Short

You go long when you think the price should increase (go up) and short when you think the price should go down. You can bet both ways in DeFi. Markets don’t care if you’re bullish or bearish, only if you’re right.

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Margin

Margin is the money you put down to open a leveraged trade. It’s your skin in the game. There are two types of margin:
  • Initial margin: What you stake to open the trade.
  • Maintenance margin: The minimum you must keep to avoid liquidation.
If your margin drops below the maintenance level you will get liquidated.

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Isolated vs Cross Margin

  • Isolated Margin: Only the funds in that one position are at risk. If it tanks, your trade closes automatically.
  • Cross Margin: Your entire balance across the platform is used to keep the position alive.

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Liquidation Price

Liquidation Price is the price level where your trade gets force-closed because your collateral is no longer enough to cover your losses. Imagine you’re trading with 10x leverage. You don’t need ETH to crash all the way; just a 10% dip could wipe you out. Your liquidation price depends on:
  • The leverage you used.
  • The entry price.
  • The collateral backing your trade.
The higher the leverage, the closer the liquidation price is to your entry.

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PnL (Profit and Loss)

Your PnL tells you if you’re up (made money) or down (lost money) overall.
  • Unrealized PnL = the gains/losses if you closed now.
  • Realized PnL = what you actually made or lost after closing.
Unrealized PnL is a mirage. It’s not sealed until you close the trade.

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Stop-Loss

Stop loss is the price where you want to close your trade if the price reaches a certain level. You tell the platform: “If the price drops this far, close my position and cut my losses.”

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Open Interest (OI)

Open Interest is the total number of active leveraged positions (longs + shorts) in a market. Think of it like this:
If 1,000 people are in a tug-of-war betting on ETH’s price: that’s the Open Interest.
  • High OI = lots of traders are betting.
  • Rising OI = fresh money is entering the market.
  • Falling OI = traders are closing their positions.
OI helps you sense how much is at stake in a particular market. More OI = more action = more volatility.
TermWhat It Means
Open InterestTotal active leveraged trades
Funding RateFee paid between longs and shorts
LiquidationForced close when collateral drops too low
MarginYour collateral (initial & maintenance)
Stop-LossAuto-close to cap your losses
Long / ShortBetting on price going up / down
PnLYour gains or losses, real or potential
Isolated / CrossRisk per position vs. risk across whole balance
Leverage trading sounds interesting at first but it’s very risky. Trade with caution.