What is Liquidation?
Liquidation is when an exchange forces you to close your position in futures or margin trading when your losses become greater than the margin required to maintain it.
It's a safety measure that prevents further losses by automatically closing your position when you can't afford to lose any more.
How liquidation happens
1. You enter a position
• A user opens a long or short position with a certain amount of margin as collateral.
• The leverage determines the liquidation price.
2. Market Price Movement
• If the market price moves against the direction of your position, you incur a loss.
• As the loss grows, it approaches the account's Maintenance Margin level.
3. Liquidation Trigger Occurs
• If the remaining margin in your account, based on the index price, falls below the Maintenance Margin, the liquidation engine will automatically intervene.
• The system will attempt to force close the position to prevent losses from escalating.
4. Position closure and settlement
• The position is forced closed at the market price, and the remaining margin is returned to the user after deducting liquidation costs.
• In the event of a sharp price change, the insurance fund or automatic deleveraging (ADL) mechanism may be triggered.
What is auto-deleveraging?
Auto-deleveraging (ADL) is a mechanism whereby, in the event of liquidation losses that are not covered by the insurance fund, the losses are covered by forcibly liquidating the positions of other users with counterparty positions, so that the counterparty positions are transferred to the risk, and traders with counterparty positions are automatically liquidated without their consent.
• During a deleveraging event, the system will force the liquidation of positions among users with opposite positions, prioritizing those with the highest risk (high leverage + high unrealized return).
• Users who were holding positions when deleveraging occurred can be found in the order execution history.
⚠️ Why liquidation is important • When liquidation occurs, your entire margin can be wiped out. • The higher the leverage, the more easily liquidation can occur.
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Consequences of liquidation
• Any open positions will be closed immediately.
• In the case of cross margin, the entire account balance is lost.
Liquidation Price (Liq. Price)
• Refers to the exact price at which liquidation occurs
• The exchange automatically calculates the liquidation price based on the entry price, leverage, and margin and displays it in the position information.
💡Liquidation Example (based on the above)
User sells (short) 0.1199 BTC for 108,000 USDT with 40x leverage → market price increases, accumulating losses → liquidation price is reached (161,602.7 USDT)
→ Result: The exchange automatically closes the position (Close)
⚠️ Liquidation is executed based on Index Price and executed at Market.
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Main ways to lower the liquidation price
1. Put in additional margin
• There are ways to put in more funds to maintain your position.
◦For cross margin, deposit additional assets into your futures wallet against the position you hold
◦For isolated margin, place additional margin on your position
2. Reducing the number of positions
• Reducing the number of positions also reduces the required maintenance margin, which lowers the risk of liquidation and lowers the liquidation price.
3. Increase/decrease entry average price
• Adjust the entry average price by strategically executing additional entries.
• Lower the average entry price for long positions, or raise the average entry price for short positions to adjust the liquidation price.
4. Reduce leverage
• Reducing leverage will require more margin, but the liquidation price will be further away from the current price, reducing the risk of liquidation.
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