Leverage involves the potential to multiply your trading returns. We defined the Locked Margin (L%) above. So, in our example, to buy or sell n LTC-BTC contracts, you need to have only:
n * m * L% * f (in BTC).
In your account, this also means that the maximum position size you can afford is 1/(L%) times the collateral (in USD) that you have available.
To understand the potential of leverage, we will consider two scenarios for traders, one with leverage and one without leverage.
Suppose you have 7000 INR, which allows you to buy 0.01 BTC when the price of BTC is 7000 INR. In a week, let’s say BTC’s price rises by 10% and trades at 7700 INR. Your profit is then Rs 700 (7700 – 7000).
RoI = 700/7000 = 10%
You deposit 7000 INR in the deposit margin.
Let’s assume the Locked Margin (L%) = 10% and the contract size is 0.01 BTC. The number of contracts you can therefore afford to buy = 1/10% = 10.
You then buy 10 INR-BTC contracts.
PnL = 10*0.01*(7700 - 7000) = 7000 INR
ROI = 7000/7000 = 100%
Note: Leverage has a multiplier effect on profits as well as losses. If your losses exceed the amount you have deposited in your Locked Margin account, the exchange will give you a margin call or will liquidate your positions to compensate for the losses.