Introduction

Perpetual futures are widely used by traders seeking leverage, flexibility, and capital efficiency. These same characteristics, however, mean that risk can change rapidly. Compared to spot markets, small misunderstandings in perpetual futures can have outsized consequences due to the leverage amplification factor.

While many losses experienced by traders are caused by unexpected market moves, a key avoidable source of loss is the lack of familiarity and understanding of how leverage, margin, funding, and pricing mechanisms interact. Perpetual futures do not behave like spot markets, and treating them as such can lead to positions that appear manageable but are structurally fragile.

Understanding where risk typically arises is essential to using these products responsibly, and so in this article, David Todd, Chief of Staff at One Trading, outlines several common areas where risk can escalate unexpectedly, with a focus on leverage, funding, margin requirements, and pricing mechanisms.

Overusing leverage

One of the most common misunderstandings in perpetual futures trading is the effect of leverage on liquidation risk.

Leverage reduces the amount of capital required to open a position (initial margin), but it also reduces the distance to liquidation. At 10x leverage, with a 1% maintenance margin requirement, a price move of approximately 9% against the position is enough to trigger liquidation. The same position with 5x leverage would require an 18% movement against the position to trigger liquidation, but the potential upside is also reduced.

The issue is not leverage itself. Used carefully, leverage can be an effective tool. The problem is the false sense of control it can create. Positions feel smaller because less margin is posted, even though the underlying exposure remains unchanged. As a result, traders may take on more risk than they realise.

Ignoring funding costs

Because perpetual futures are free-floating and do not expire, funding payments are used to keep prices aligned with the underlying spot market. These payments occur at regular intervals and are typically small on each cycle, which makes them easy to overlook.

However, when positions are held over extended periods, funding costs can accumulate and materially erode equity. This effect is magnified at higher leverage levels, where a relatively small funding rate can represent a significant percentage of posted margin over time.

Funding is not just a pricing mechanism. It is an ongoing cost or benefit that can directly affect position sustainability.

Misunderstanding maintenance margin

Another frequent source of confusion is the distinction between initial margin and maintenance margin.

Initial margin determines whether a position can be opened. Maintenance margin determines whether it can remain open. Once equity falls to the maintenance margin threshold, liquidation begins automatically.

Traders who focus only on initial margin may believe a position is safe because it is far from losing all posted collateral. In reality, liquidation occurs well before equity reaches zero. Treating maintenance margin as a soft guideline rather than a hard constraint often leads to positions that are only a small market move away from forced closure.

Confusing the mark price with the last traded price

Liquidations in perpetual futures are typically based on the mark price, not the most recent trade price. This distinction is frequently misunderstood.

The mark price incorporates broader reference data and is designed to reduce the impact of short-term price manipulation or illiquid trades. During volatile conditions, the mark price may move ahead of or lag behind the visible last traded price.

Traders who monitor only the last trade may be surprised to find their position liquidated even though the market never appeared to trade at their liquidation level. This effect is particularly noticeable in thin markets, where trades occur sporadically and prices can gap between executions.

A common underlying theme

Across these misunderstandings, a consistent pattern emerges: too much focus on price direction, with not enough focus on market mechanics.

Perpetual futures are excellent tools when paired with disciplined risk management that takes into account leverage, funding, margin, and pricing rules – the core drivers of outcomes in these markets.

A solid understanding of these mechanics does not eliminate risk, but it reduces the likelihood of avoidable losses in an environment where losses can accelerate rapidly.

Conclusion

Perpetual futures are powerful trading tools. They allow traders to express market views with capital efficiency, hedge risk, and access liquidity in ways that are not possible in spot markets. That power, however, comes with complexity. Leverage, funding, margin, and liquidation mechanics interact continuously, and small misunderstandings can compound into expensive mistakes.

Consistent outcomes in perpetual futures come from education, realistic expectations, and respect for how the products actually behave. Traders who take the time to understand the system they are operating in, and who deliberately and effectively manage their risk, are far better positioned to navigate volatile markets.