What is Fixed Leverage? How Does it Work in BITFLEX?

Leverage trading involves using borrowed funds (margin) to open larger trading positions than you could with your own capital alone. Traders can use leverage to increase their exposure to price movements without having to invest the full amount of capital required for the position.

There are two common types of leverage in crypto trading:

1. Effective Leverage
2. Fixed Leverage 

What is the Difference Between Effective Leverage and Fixed Leverage?

Fixed leverage refers to predetermined and constant leverage that remains unchanged throughout the duration of a trading position. In this case, the leverage ratio is set at a specific value and does not adjust based on the market price fluctuations of the traded contract. This means that regardless of any unrealized profit or loss in the position, the leverage remains fixed.

On the other hand, effective leverage considers the dynamic nature of the market and adjusts the leverage ratio based on the unrealized profit or loss in the position. As the market price of the contract changes, the effective leverage updates accordingly. If the position's unrealized profit increases, the effective leverage decreases, whereas if the unrealized loss increases, the effective leverage increases.

The main benefit of using fixed leverage is that it simplifies risk management even more compared to effective leverage, so that a trader has more control over this position.

Can I Change Leverage When I’m in a Trade? 

Yes, if you want to, you can change and update the leverage ratio associated with your open position whenever you want – given that you meet the minimum margin requirement for the position and you don’t have any unfilled orders for that perpetual contract.

However, please note that if you change the leverage of an open position, it will affect the initial margin, which will in turn affect the liquidation price of your position. 

How Does Fixed Leverage Affect My Unrealized P&L? 

No, fixed leverage doesn’t affect your unrealized P&L as your uP&L depends on your position size.

For you to understand how fixed leverage doesn’t affect your unrealized P&L, you need to understand how leverage works. 

A common misconception that a lot of traders have is that higher leverage means more gains, which is not necessarily true. The main function of leverage, or at least the main function of leverage in BITFLEX is to determine how much initial margin a trader will require to open his position. 

Higher leverage means less initial margin required and lower leverage means more initial margin required. 

The Unrealized P&L of an open position is calculated using this formula:

Unrealized P&L (Long) = P&L

Unrealized P&L (Short) = -1 x P&L

where;

P&L = Position Value – Position Open Value

Position Value = Current Price x Position Qty 

and;

Position Open Value = Entry Price x Position Qty 

Here’s an example to showcase this: 

Suppose a long trade for BTC where:

Entry Price: 30,000

Current Price: 50,000

Position Qty: 1 BTC

The trader’s unrealized P&L will remain the same regardless of his leverage as he has the same position qty. The leverage he chooses is only used to calculate how much initial margin will be required to open the position. 

Please Note:

• While the leverage changes and the position quantity remain the same, unrealized P&L isn’t affected. Therefore, higher leverage doesn’t mean higher P&L. 
• Unrealized P&L depends on position quantity, entry price, and exit price. So,
  • Larger position quantity means higher unrealized P&L
  • Larger difference between entry price and exit price means higher unrealized P&L
• The above example doesn’t take fees into account.

How Does Fixed Leverage Affect Unrealized PnL% of a Position?

On the other hand, fixed leverage does affect the unrealized PnL% of a position. 

When leverage is adjusted for a position the initial margin requirements will change while the position size (QTY) remains unchanged

An increase in leverage will reduce the initial margin required.

A decrease in leverage will increase the initial margin required.

Thus, with the same unrealized P&L, when the initial margin increases and the unrealized P&L% will be reduced. On the other hand, a reduction in the initial margin will increase the unrealized P&L%, even though the actual unrealized P&L of the position remains the same.

Unrealized P&L% = Unrealized P&L / Margin x 100%

Here’s the same example from above to showcase this: 

Please Note: 

• When the leverage is increased, unrealized P&L remains the same, but unrealized PnL% changes. So,
  • Higher leverage means lower initial margin, which means higher unrealized P&L%
• The above example doesn’t take fees into account.