What Are Futures and Leverage? Why Beginners Should Stay Away

Leverage means using borrowed funds to amplify your trading position. For example, with 10x leverage, 1,000 yuan can control a 10,000 yuan position. While it magnifies potential gains, it also multiplies the risk of losses.

Spot trading means you buy and hold the actual asset, with no risk of liquidation and maximum loss limited to your capital. Futures trading involves leverage and allows both long and short positions. If the price moves against you significantly, your position may be forcibly closed (liquidated), potentially losing all your capital. Beginners are strongly advised to start with spot trading only.

When the price moves against your position and your losses approach the margin amount, the exchange will forcibly close your position to prevent you from owing money. This is called liquidation, and it results in losing all your capital. The higher the leverage, the smaller the price movement needed to trigger liquidation.

It is highly not recommended. High leverage amplifies volatility, making beginners prone to liquidation and emotional trading, often leading to repeated losses. You should first practice placing orders, setting stop-losses, and managing positions in spot trading. Only after understanding your own risk tolerance should you consider whether to try futures, and if so, with very low leverage.

Reputable platforms use forced liquidation mechanisms to close positions before your capital is completely wiped out, aiming to prevent you from owing money. However, in extreme market conditions, there is still a risk of negative equity. In any case, losing all your capital is already a huge cost.