MODULE 04 · LESSON 2 · 7 MIN
Leverage Policy & Liquidation Distance
Goal: Set a leverage policy that keeps liquidation structurally unreachable.
Module 1 gave you the mechanics. This lesson is the policy that makes the mechanics irrelevant.
The only liquidation rule
Your stop must always execute before liquidation can. The stop is the planned exit; the liq engine is the disaster exit. The whole policy is keeping a fat cushion between them:
order of prices (LONG): liq price << SL < entry the << gap is the policy
If the gap between SL and liq is thin, ordinary slippage in fast conditions can blow through the stop INTO the liquidation — the worst possible exit on the worst possible day. Size and margin so the liq sits far beyond the stop, which itself sits beyond plausible wick range (M01-L04).
Effective leverage discipline
High account leverage is survivable only when position notionals are small relative to account — effective leverage (total notional / account) is the number that matters, not the dial the exchange shows. A desk running the M03 budgets rarely sees effective leverage above low single digits, regardless of the per-position dial.
The asymmetry that pays the bills
Lose 20% and you need 25% to recover. Lose 50% and you need 100%. Drawdown math is convex against you — which is why every rule in this module is about capping the LEFT tail. The system's edge (when present) takes care of the right tail; your job is making sure you are still solvent when it shows up.
Takeaways
- ▸ Policy: stop executes long before liq can. Keep the SL→liq gap fat.
- ▸ Effective leverage (total notional / account) is the real number, not the dial.
- ▸ Drawdown math is convex against you — every rule caps the left tail.
Checkpoint
Answer all questions correctly to complete the lesson. Misses reset for another pass — no penalty.
1. Correct LONG price order:
2. You lose 50% of the account. Required recovery:
3. The number that measures real leverage exposure: