ROE (Return of Equity) is calculated using the unrealized P&L of position in coins / initial margin of position.
When leverage is adjusted for a position the initial margin requirements will change while the position size (QTY) remains unchanged
- An increase in leverage will reduce the initial margin required
- A decrease in leverage will increase the initial margin required.
Thus with the same unrealized P&L, the initial margin increases the ROE will be reduced while a reduction in the initial margin will increase the ROE, even though the actual unrealized P&L in coins is the same.
In a simple example,
Position size: 1000 BTCUSD
Leverage use: 10x
Average entry price: 6800
Current last traded Price: 7000
initial margin: (1000 / 10) /6800 = 0.0147058824 BTC
Unrealized P&L of position (excluding fees): 1000 x (1/6800 - 1/7000) = 0.00420168 BTC
ROE: 0.00420168 / 0.0147058824 x 100 = 28.57142391%
Now assuming the leverage use is increased to 20x
New initial margin: (1000 / 20) /6800 = 0.0073529412 BTC
ROE: 0.00420168 / 0.0073529412 x 100 = 57.14284782%
Notice that in the above example, even after applying higher leverage, the only variable that changed was the position margin (denominator) and as a result, the ROE increased (from 28% to 57%). However, the P&L in coins (Blue number) remained constant if the trader closes the position, the profit and loss will still be the same regardless whether he is using 10x or 20x leverage.