Volatility and leverage together
Why does the same leverage multiplier feel survivable one week and wipe out a position the next?
In plain words
Leverage magnifies every percentage move of the underlying market, and volatility is the size of those moves. A given leverage is only as safe as the current volatility allows: if the market moves against the position by a large enough fraction, a leveraged account is wiped out before the market has any chance to recover.
Why it matters
Risk rules calibrated on a calm week quietly become far too loose when volatility jumps, because the same percentage move eats a much larger share of a leveraged account's margin. Traders who size positions by leverage alone, rather than by recent volatility, tend to discover this gap at the worst moment, when the market is already moving hardest.
In a real week: BTC, week of 13 June 2022
In the week of 13 June 2022, BTC fell 22.58%, spanning a range of 52.63%, with realised volatility at 143.0% annualised and the largest single hour at -4.82% at 06:00 UTC on Sat, 18 June. On five-times leverage, every percentage point of market move counts as five against margin, so a fall of that size exceeds the margin backing the position entirely. The prior four weeks held returns of -3.3%, -2.73%, 1.53% and -11.18%, with the largest a fall of 11.18%, every one of them smaller in size than this week's 22.58% decline.
A common mistake
Reading leverage as a fixed risk level. A multiplier does not measure risk by itself; the market's volatility during the holding period determines whether that multiplier is comfortable or fatal.