Leverage and liquidation

Leverage reduces the time available for a thesis to be right.

Leverage and liquidation

Leverage and path risk — liquidation before the thesis can play out

| Concept | Explanation | |---|---| | Leverage | Exposure exceeds committed capital. | | Margin | Collateral supporting the position. | | Maintenance margin | Minimum collateral required to keep the position open. | | Liquidation | Forced closure after collateral falls below requirements. | | Funding cost | Interest or periodic payment required to maintain leverage. | | Path risk | Temporary adverse movement causes failure before the expected outcome. |

Key idea: Leverage reduces the time available for a thesis to be right.

Module knowledge check

  1. How is risk-based position size calculated?
  2. Why can a stop order fail to cap loss at the selected level?
  3. What information is missing from a risk-reward ratio alone?
  4. What is path risk in a leveraged position?

velaHita Academy home