Understanding Leverage, Fees & Liquidation

When you trade outside the spot market (where you just buy and sell coins normally), you’ll hear about leverage. Leverage is basically borrowing money from the exchange to increase your buying power.

Think of it like this:

• You only have $35.

• With 10x leverage, the exchange lends you extra so that you can trade with $350 total.

• You’re still risking your $35, but your potential profit and loss are now 10x bigger.

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Example: Position Size with Leverage

• You have $35.

• Use 10x leverage → your position size becomes $350.

• Let’s say XRP is priced at $0.40.

• With $350, you can now buy:

350÷0.40=875 XRP350 ÷ 0.40 = 875 XRP350

So your $35 has effectively “controlled” 875 XRP, thanks to leverage.

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Profit Example

Now imagine XRP goes from $0.40 → $0.60.

Your new position value =

875 × 0.60 = $525

Profit = $525 − $350 = $175

Notice: your starting $35 has turned into $210 ($35 + $175 profit). Without leverage, this move would’ve given you only a small gain.

That’s the power of leverage but also the danger, because losses also get multiplied.

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Using Bybit Calculator

Most exchanges like Bybit have a calculator.
You just enter:

• Entry price

• Exit price

• Leverage

• Quantity

And it will show you:

• Profit/Loss

• Profit/Loss %

• ROI (Return on Investment)

⚠️ But keep in mind: this calculator doesn’t include trading fees and funding fees.

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Trading Fees

Every time you open or close a trade, you pay trading fees.

• If you use a market order (instant buy/sell), fees are usually higher.

• If you use a limit order (waiting for a price), fees are lower.

• Different exchanges have different fee rates.

This is the exchange’s way of making money for providing the platform.

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Funding Fees

Funding fees are a bit more confusing. They happen every 8 hours.

Think of it as a small payment between traders:

• Sometimes longs (buyers) pay shorts (sellers).

• Other times shorts pay longs.

• It depends on whether the futures market price is above or below the spot price.

Why does this exist? → It keeps the perpetual futures price close to the real spot price.

So depending on your position and timing, you might either pay funding or receive it.

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Liquidation Price

One of the most important things to understand.

Liquidation price = the price where your margin ($35 in this example) is wiped out.

• If the trade goes against you, the exchange will close your position automatically at this price.

• You lose your initial margin, but not more than that.

Liquidation depends on:

• Leverage used

• Position size

• Margin mode (Cross vs Isolated, we’ll explain that in the next lesson).

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Stop Loss and Take Profit

To avoid liquidation, you can set a stop loss. Example:

• Entry: $0.40

• Stop loss: $0.39

If price hits $0.39, you exit automatically. Loss = about $8.75. Much better than losing the whole $35.

Similarly, you can set take profit:

• Maybe at $0.60 you want to secure gains.

• You can even take 50% profit, and leave 50% running.

This way, you lock in profit while still letting the trade play out.

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Why Fees Aren’t Always Calculated

Remember: calculators don’t always include fees because we can’t know them until the trade actually closes.

• Funding depends on timing (positive or negative).

• Trading fees depend on whether you use market/limit orders.

So your “realized” profit may be slightly lower than the calculator shows.

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In summary:

• Leverage = borrowed buying power.

• Position size grows, but so does risk.

• Fees = exchange charges and periodic funding between traders.

• Liquidation price = the danger zone.

• Stop loss/take profit = tools to protect yourself.

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This is the fundamental starting point for trading futures. In the next part, we’ll go deeper into cross vs isolated margin and how they change your risk.