Liquidation is a critical concept in leveraged trading. It occurs when the Mark Price reaches your position's liquidation price, resulting in the forced closure of that position at the bankruptcy price (the level where margin is fully depleted). Essentially, this happens when your position margin can no longer cover the required maintenance margin, leading to a margin call.
For instance, imagine your long position has a liquidation price of 15,000 USDT while the current Mark Price is 20,000 USDT. If the Mark Price falls and hits 15,000 USDT, your unrealized loss equals the maintenance margin. This triggers the liquidation process.
How Liquidation Price is Calculated
The method for calculating your liquidation price differs significantly based on your chosen margin mode: Isolated or Cross. Understanding both is vital for effective risk management.
Isolated Margin Mode
In Isolated Margin mode, the margin allocated to a specific position is separated from your overall account balance. This mode caps your potential loss to the amount of margin you assigned to that particular position, offering a controlled risk environment.
Calculation Formulas
For a Long/Buy Position:
Liquidation Price = Entry Price - [(Initial Margin - Maintenance Margin) / Position Size] - (Extra Margin Added / Position Size)
For a Short/Sell Position:
Liquidation Price = Entry Price + [(Initial Margin - Maintenance Margin) / Position Size] + (Extra Margin Added / Position Size)
Key Terms Defined:
- Position Value: Contract Size × Entry Price
- Initial Margin (IM): Position Value / Leverage
- Maintenance Margin (MM): (Position Value × Maintenance Margin Rate) - Maintenance Margin Deduction
- The Maintenance Margin Rate (MMR) depends on your chosen risk limit tier.
Practical Examples
Example 1: Basic Long Position
A trader buys 1 BTC at 20,000 USDT using 50x leverage. The MMR is 0.5%, and no extra margin is added.
- Initial Margin = (1 × 20,000) / 50 = 400 USDT
- Maintenance Margin = (1 × 20,000 × 0.5%) - 0 = 100 USDT
- Liquidation Price = 20,000 - (400 - 100) = 19,700 USDT
Example 2: Short Position with Added Margin
A trader sells 1 BTC at 20,000 USDT with 50x leverage and later adds 3,000 USDT in margin.
- Initial Margin = (1 × 20,000) / 50 = 400 USDT
- Maintenance Margin = (1 × 20,000 × 0.5%) - 0 = 100 USDT
- Liquidation Price = 20,000 + (400 - 100) + (3,000 / 1) = 23,300 USDT
Example 3: Impact of Funding Fees
Using the initial long position from Example 1, the trader accrues 200 USDT in funding fees but has no available balance to pay them. The fees are deducted from the position margin.
- The reduced position margin moves the liquidation price closer to the Mark Price.
- New Liquidation Price = 20,000 - (400 - 100) - (-200 / 1) = 19,900 USDT
Cross Margin Mode
In Cross Margin mode, your entire available balance acts as margin for all open positions. This means the liquidation price for any single position is dynamic and can change based on the performance of other positions in your account. Liquidation occurs only when your total available balance is exhausted and cannot cover the maintenance margin for a losing position.
Core Calculation Logic
The liquidation price is determined by your total sustainable loss, which is:
Total Sustainable Loss = Available Balance + Initial Margin - Maintenance Margin + Unrealized Profit
This amount is then used to calculate how far the price can move against your net exposure before liquidation is triggered.
Illustrative Examples
Example 1: Simple Long Position
A trader opens a 2 BTC long position at 10,000 USDT with 100x leverage. Their available balance is 2,000 USDT, and the MMR is 0.5%.
- Maintenance Margin = 2 × 10,000 × 0.5% = 100 USDT
- Total Sustainable Loss = 2,000 - 100 = 1,900 USDT
- This allows for a price drop of 950 USDT (1,900 / 2).
- Liquidation Price = 10,000 - 950 = 9,050 USDT
Example 2: Position in Profit
The price in Example 1 rises to 10,500 USDT, creating an unrealized profit of 1,000 USDT.
- Total Sustainable Loss = 1,800 (new Available Balance) + 200 (IM) - 100 (MM) + 1,000 (Profit) = 2,900 USDT
- The position can now sustain a larger loss of 1,450 USDT (2,900 / 2).
- Liquidation Price = 10,500 - 1,450 = 9,050 USDT
Example 3: Partially Hedged Portfolio
A trader holds a 2 BTC long position and a 1 BTC short position. The net exposure is 1 BTC long. With an available balance of 3,000 USDT and a Mark Price of 9,500 USDT:
- Initial Margin (for 1 BTC net) = (1 × 10,000) / 100 = 100 USDT
- Maintenance Margin = 1 × 10,000 × 0.5% = 50 USDT
- Liquidation Price (Long) = [9,500 - (3,000 + 100 - 50)] / 1 = 6,450 USDT
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Key Factors Influencing Liquidation Price
Several dynamic elements can cause your liquidation price to shift, especially in Cross Margin mode.
- Unrealized PnL of Other Positions: Losses on other trades reduce your shared available balance, moving liquidation prices closer to the current market price for all positions. Profits do not increase the available balance used for margin calculations.
- Adding/Removing Margin: Manually adding margin to an isolated position pushes its liquidation price further away.
- Funding Fees: If you have insufficient available balance, funding fees are deducted from your position margin. This reduces the margin buffer and brings the liquidation price closer, increasing risk.
- Opening New Positions: In Cross Margin, opening a new position uses part of your available balance as initial margin. This reduction in available balance affects the liquidation price of all existing positions.
Frequently Asked Questions
What exactly triggers a liquidation?
Liquidation is triggered when the Mark Price reaches your calculated liquidation price. At this point, your position margin has fallen to the maintenance margin level, and the exchange automatically closes the position to prevent further losses.
What is the difference between Mark Price and Last Price?
The Mark Price is a calculated fair value based on spot index prices and funding rates, used to prevent market manipulation and determine liquidations. The Last Price is simply the price of the most recent trade. Exchanges use Mark Price for liquidation to ensure fairness.
Can I avoid liquidation?
Yes, you can take action to avoid being liquidated. You can add more margin to your position (in Isolated mode), close part of your position to realize some profit or reduce loss, or set a stop-loss order to automatically exit before reaching the liquidation price. 👉 Learn proven strategies to avoid liquidation
How does Cross Margin affect my liquidation risk?
Cross Margin links the fate of all your positions. A significant loss on one trade consumes the available balance that was supporting your other positions. This can cause the liquidation prices of your other, potentially profitable, positions to move dangerously close to the market price, even if they are in profit.
What happens if I have a perfectly hedged position?
A perfect hedge (e.g., an equal long and short position on the same asset with the same contract size) will generally not be liquidated in Cross Margin mode. The profit from one side should always offset the loss on the other, meaning the maintenance margin requirement is effectively neutralized.
Why did my liquidation price change suddenly?
Your liquidation price in Cross Margin can change due to the unrealized loss of another position, the deduction of funding fees from your margin, or a change in the maintenance margin rate caused by adjusting your risk limit tier.