Liquidation

What is Liquidation?

Liquidation is the automatic closure of your leveraged position when your losses reduce your margin below the maintenance requirement. The exchange forcibly sells your position to prevent further losses.

How Liquidation Works

The Process

1. You open leveraged position with margin
2. Price moves against you
3. Unrealized losses grow
4. Losses approach your margin
5. Exchange closes position automatically
6. You lose most or all margin

Liquidation Example

Setup

• You have $1,000
• Use 10x leverage to open $10,000 BTC long at $70,000
• Liquidation price: approximately $63,000 (10% below entry)

What Happens

• BTC drops to $63,000
• Your $10,000 position now worth $9,000
• Loss: $1,000 (your entire margin)
• Position liquidated
• You’re left with nearly $0

Calculating Liquidation Price

Basic Formula (Long)

Liquidation Price ≈ Entry Price × (1 - 1/Leverage)

By Leverage Level

Leverage	Approx. Move to Liquidation
2x	50%
5x	20%
10x	10%
20x	5%
50x	2%
100x	1%

Exact calculation includes fees and maintenance margin

Types of Margin

Initial Margin

• Required to open position
• Your collateral/deposit

Maintenance Margin

• Minimum required to keep position open
• Usually lower than initial
• Liquidation occurs when you fall below this

Available Margin

• Unused margin for new positions
• Decreases as losses grow

Isolated vs Cross Margin

Isolated Margin

• Only position’s margin at risk
• Liquidation only affects that position
• Safer for individual trades
• Recommended for beginners

Cross Margin

• Entire account balance is margin
• All positions share margin
• One bad trade can liquidate everything
• Higher risk

Partial vs Full Liquidation

Partial Liquidation

• Only part of position closed
• Reduces exposure automatically
• Keeps some position open
• Used by some exchanges

Full Liquidation

• Entire position closed
• Total loss of margin
• No position remains

Liquidation Fees

What You Pay

• Exchange keeps a fee
• Added to loss
• Typically 0.5-1% of position
• Varies by platform

Avoiding Liquidation

Use Lower Leverage

• More room for price movement
• Bigger safety buffer
• Can survive volatility

Set Stop-Losses

• Exit before liquidation
• Keep some capital
• Always use them

Monitor Positions

• Watch liquidation price
• Add margin if needed
• Be aware of market conditions

Position Sizing

• Don’t use all available margin
• Leave room for error
• Risk 1-2% per trade max

Liquidation Cascades

What They Are

Mass liquidations causing further price drops:

1. Price drops
2. Leveraged longs liquidated
3. Liquidation = forced selling
4. More selling = lower price
5. More liquidations triggered
6. Cascade effect

Famous Examples

• March 2020 COVID crash
• May 2021 China ban news
• FTX collapse November 2022

Liquidation on Major Exchanges

Binance

• Insurance fund protects
• Isolated and cross available
• Liquidation calculator provided

Bybit

• Partial liquidation system
• ADL (Auto-Deleveraging) for extreme cases
• Insurance fund backup

OKX

• Similar to Binance
• Insurance fund coverage
• Clear liquidation warnings

Warnings Before Liquidation

Exchange Notifications

• Margin level warnings
• Approaching liquidation alerts
• Email/app notifications

Take Action

• Add more margin
• Reduce position size
• Close position manually

What Happens to Your Funds

At Liquidation

• Position closed at market
• Remaining margin minus fees returned
• Often very little remains
• Sometimes nothing remains

Insurance Fund

• Covers negative balance
• Protects other users
• Funded by liquidation fees

Mental Framework

Liquidation Prevention Mindset

• Treat liquidation as failure of risk management
• Not just “bad luck”
• Always know your liquidation price
• Never be surprised by liquidation

If Liquidated

• Learn from the mistake
• Analyze what went wrong
• Adjust strategy going forward
• Don’t revenge trade