How to Simulate Leveraged Trading in Pine Script

Understanding Leveraged Trading in Pine Script

Pine Script® strategies (v4+) inherently support simulated leveraged trading, allowing traders to emulate borrowing funds from a broker to amplify position sizes beyond their account balance. This mechanism replicates real-world margin trading conditions while backtesting strategies.

Key Concepts

• Leverage Ratio: Expressed as X:1 (e.g., 5:1), indicating how much the position size multiplies relative to account equity
• Margin Requirement: Minimum account equity percentage needed to open/maintain a position (e.g., 20% margin = 5:1 leverage)
• Forced Liquidation: Occurs when equity falls below required margin, triggering a Margin Call event

👉 Master advanced Pine Script techniques to optimize your trading strategies.

Configuring Margin Settings

Default Strategy Parameters

Pine Script allows margin configuration through:

strategy(title, 
         margin_long=20,    // Default 20% margin for longs
         margin_short=20)   // Default 20% margin for shorts

Practical Example

For EURUSD at 1.05:

• No Leverage (1:1): 100% margin → 105,000 USD required for 100,000 unit position
• 20:1 Leverage: 5% margin → 5,250 USD required for same position

Critical Note: Leverage magnifies both profits and losses. Always assess risk tolerance before live trading.

Margin Call Mechanics

Trigger Conditions

A Margin Call occurs when:

CurrentEquity ≤ MarginRequired

Where:

• CurrentEquity = (PriceChange × Direction × PointValue × PositionSize) + InitialCapital + NetProfit
• MarginRequired = LastPrice × PointValue × PositionSize × (MarginPercent/100)

Liquidation Calculation Example

For a GOOG long position (40 shares @ $100) with:

• Initial capital: $1,000
• 20% margin requirement

At $90 price:

CurrentEquity = (90-100)×1×1×40 + 1000 = $600
MarginRequired = 90×1×40×0.2 = $720 → Triggers Margin Call

Visualizing Liquidation Prices

Use Pine Script's built-in function:

plot(strategy.margin_liquidation_price, 
     color=color.blue, 
     title="Liquidation Price")

Manual calculation formula:

LiquidationPrice = ((InitialCapital + NetProfit)/(PointValue×PositionSize) - Direction×EntryPrice) / (MarginPercent/100 - Direction)

Advanced Liquidation Mechanics

Position Sizing Algorithm

1. Money Spent = PositionSize × EntryPrice
2. Market Value = PositionSize × CurrentPrice
3. Open Profit = -ABS(MarketValue - MoneySpent)
4. Equity = InitialCapital + NetProfit + OpenProfit
5. Margin Ratio = MarginPercent/100
6. Margin = MarketValue × MarginRatio
7. Available Funds = Equity - Margin
8. Money Lost = AvailableFunds/MarginRatio
9. Shares to Liquidate = TRUNCATE(MoneyLost/CurrentPrice)
10. Final Liquidation = SharesToLiquidate × 4

TSLA Case Study

Parameters:

• Position: 682,438 shares @ $4.43
• Margin: 25%
• Price drop to $3.90

Calculations:

1. Money Spent: $3,023,200.34
2. Market Value: $2,661,508.20
3. Open Profit: -$361,692.14
4. Equity: $638,307.86
5. Margin Ratio: 0.25
6. Margin Required: $665,377.05
7. Available Funds: -$27,069.19
8. Money Lost: -$108,276.76
9. Shares Liquidated: -27,763
10. Margin Call Execution: 111,052 shares

Frequently Asked Questions

How does leverage affect backtest results?

Leverage amplifies both simulated gains and losses proportionally. A 5:1 leverage means 5x larger positions with correspondingly magnified P&L.

What's the minimum safe margin percentage?

We recommend never setting margin below 10% (10:1 leverage). Zero margin disables position validation, potentially yielding unrealistic results.

Why does the broker liquidate 4x the required amount?

This cushion prevents consecutive Margin Calls during volatile periods. The 4x multiplier ensures sufficient capital recovery after forced liquidation.

👉 Explore professional trading tools to enhance your strategy development.

Best Practices for Leveraged Simulations

1. Gradual Leverage Testing: Start with 2:1 leverage, incrementally increasing only after verifying strategy robustness
2. Stress Testing: Validate performance during extreme volatility periods
3. Margin Buffer: Maintain at least 25% extra equity above minimum requirements
4. Multi-Timeframe Analysis: Check consistency across different chart intervals

Remember: Successful simulated trading requires understanding both the technical implementation and risk management principles behind leveraged positions.