Leverage and Position Limit
Overview
Risk limits are a core risk management mechanism designed to control the exposure of individual traders, particularly in highly volatile markets. Without such constraints, a trader holding a large position with high leverage could pose systemic risks and experience significant losses.
To manage this, the system implements dynamic leverage, where the maximum allowable leverage decreases as the position size increases.
Dynamic Leverage Explained
The larger the position value, the lower the maximum leverage available to the trader.
Conversely, higher leverage selections automatically reduce the maximum allowable position size.
This creates a balanced trade-off between risk and exposure, helping to ensure market stability.
Mechanism Summary
Let:
Lmax: Maximum allowable leverage
Psize: Trader’s current position size
Then:
As Psize↑, → Lmax↓
As Lchosen↑, → Pmax↓
This relationship ensures that:
Where f and g are decreasing functions reflecting the inverse relationship between leverage and position value.
Why This Matters
This approach helps:
Prevent market manipulation
Mitigate liquidation risk
Maintain platform integrity during high-volatility periods
It protects both the trader and the broader market from the negative impact of oversized, over-leveraged positions.
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