Liquidation

Liquidation is the forced closing of a leveraged position when your collateral can no longer cover the loss. Know the liquidation price before you enter.

How it works

When you trade with leverage, your collateral (margin) covers the position's loss. The venue requires a minimum buffer called maintenance margin. If the loss eats the collateral down to that level, the system closes the position at market by itself.

The higher the leverage, the closer liquidation sits: at 10x about a 10% move against you, at 50x about 2%, and a bit less once maintenance margin and fees are counted. A liquidation usually costs almost all of the position's collateral, and the venue may charge an extra fee.

The margin mode matters. In isolated margin only this trade's collateral is at risk. In cross margin your whole account balance backs the position, and one bad trade can take everything.

Example with numbers 1

You have $1,000 and open a 10x BTC long at $60,000, a $10,000 position. A 10% drop to $54,000 is a $1,000 loss, your entire collateral. Because of maintenance margin, liquidation comes earlier, roughly around $54,300 to $54,600 depending on the venue's rules.

Example with numbers 2

The same trade at 3x: a $3,000 position, and the price has to fall about 30% to liquidate it. A stop at −3% would have cost just $90.

Common mistake

The biggest mistake is treating liquidation as your stop-loss. Liquidation takes almost all the collateral, often plus a fee. Set a stop-loss in advance, well before the liquidation price, and size the position so the loss at the stop is a small slice of your account. On sharp moves the price can jump past your level in seconds.

Questions and answers

What is liquidation in simple terms?

It is when the exchange closes your leveraged position by itself because the loss has nearly eaten your collateral. Most of that collateral is lost.

How do you calculate the liquidation price?

Roughly: for a long it is entry × (1 − 1/leverage), for a short entry × (1 + 1/leverage). The real price sits a little closer to entry because of maintenance margin and fees; the venue shows the exact figure in the order window.

How do you avoid liquidation?

Use low leverage, set a stop-loss well before the liquidation price and risk no more than 1–2% of your account per trade. Isolated margin limits the damage to one position's collateral.

Liquidation

How it works

Questions and answers

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