Liquidation is one of the most feared scenarios in leveraged trading. When market prices fluctuate violently and the margin in a position becomes insufficient, the exchange will force a close, potentially wiping out the trader’s entire investment.
This article breaks down why liquidations happen, how to calculate your liquidation price, strategies to reduce risks, and what to do if you face liquidation.
Understanding Liquidation
Liquidation occurs when a trader’s position is forcibly closed by the exchange due to insufficient margin caused by adverse price movements. In leveraged trading, if losses reach a certain threshold, the exchange steps in to prevent further losses beyond the account balance.
Example Scenario:
Imagine investing 10,000 USDT with 10x leverage to open a BTC perpetual futures position worth 100,000 USDT. If BTC’s price drops by 10%, the loss nears the margin limit. Without adding funds or setting a stop-loss, the exchange triggers liquidation, potentially resulting in a total loss.
The exact liquidation point varies by exchange due to factors like maintenance margin ratio, liquidation slippage, and fees.
Common Causes of Liquidation
1. Excessive Leverage
Leverage amplifies gains but also magnifies risks. High leverage means even small market movements can trigger liquidation.
Example:
- 5x Leverage: ~20% price move may cause liquidation
- 10x Leverage: ~10% price move may cause liquidation
- 50x Leverage: ~2% price move may cause liquidation
Higher leverage means lower tolerance for price swings—always use leverage cautiously.
2. Insufficient Margin
Exchanges require an initial margin to open a position. If prices move unfavorably and the maintenance margin is inadequate, the exchange liquidates the position.
Solution: Monitor your margin ratio regularly and add funds proactively to avoid liquidation.
3. High Market Volatility
Cryptocurrency markets are highly volatile. Sudden price swings (known as "wicks" or "spikes") can liquidate highly leveraged positions in moments.
4. No Stop-Loss Orders
Overconfidence leads some traders to avoid setting stop-loss orders. When the market moves against them, the lack of a safety net can result in a full account liquidation.
Solution: Always set a reasonable stop-loss when opening a position to limit losses automatically.
How to Calculate Liquidation Price
The liquidation price can be estimated with this formula:
Liquidation Price = Entry Price ± (Margin / Position Size × Leverage)
Example:
Alice opens a BTC long position at $100,000 using 10x leverage with a 1 BTC position size and $10,000 margin.
- Liquidation Price = 100,000 – (10,000 ÷ 1 × 10) = $90,000
If BTC’s price drops to $90,000, her position is liquidated, and she loses the margin.
- With 20x leverage, the liquidation price rises to $95,000—increasing risk.
Why Liquidation Price Varies by Exchange
Although the formula offers a basic estimate, the actual liquidation price differs across exchanges due to fees, insurance fund deductions, and liquidation mechanisms.
Below is a comparison for the same trade conditions (BTCUSDT, 10x leverage, entry: $100,000, size: 1 BTC):
| Exchange | Liquidation Price | Drop % |
|---|---|---|
| Binance | 90,255.08 USDT | 9.74% |
| Bitget | 90,361.5 USDT | 9.64% |
| MEXC | 90,096.0 USDT | 9.90% |
These differences arise because exchanges factor in:
- Liquidation fees
- Insurance fund allocations
- Slippage buffers
- Risk management policies
Always use the exchange’s liquidation calculator or risk management tools to preview your exact liquidation price before trading.
Isolated Margin vs. Cross Margin: Key Differences
Your choice of margin mode significantly impacts liquidation risk. Most platforms offer two modes:
| Mode | Definition | Liquidation Risk | Best For |
|---|---|---|---|
| Isolated Margin | Margin dedicated to a single trade | Losses limited to that position | Beginners and risk-averse traders |
| Cross Margin | All account margin shared across trades | One liquidation can affect entire account | Experienced traders with strong risk management |
✅ Recommendation: New traders should use Isolated Margin to contain risks within single trades.
5 Practical Strategies to Avoid Liquidation
1. Use Lower Leverage
Stick to 3x leverage or lower to cushion against market volatility.
2. Set Stop-Loss Orders
Always set a stop-loss when opening a position to exit automatically before liquidation.
3. Monitor and Top Up Margin
Keep an eye on your margin ratio and add funds if it nears dangerous levels.
4. Avoid Overcommitting
Don’t use all your capital in one trade. Diversify positions to mitigate sudden market moves.
5. Use Isolated Margin
With Isolated Margin, liquidation only affects one trade, not your entire account.
👉 Explore advanced risk management tools
Using Liquidation Data and Heatmaps
Platforms like Coinglass provide liquidation data and heatmaps to help traders monitor market risks.
Coinglass Liquidation Data
- Total Liquidation Volume: Track daily or periodic liquidation amounts.
- Long/Short Liquidation Ratio: Gauge market sentiment and trend strength.
- Exchange Liquidation Rankings: Compare risk levels across exchanges.
Coinglass Liquidation Heatmap
- Identify liquidation clusters to predict support and resistance levels.
- Analyze leverage distribution to anticipate price movements.
Frequently Asked Questions
What exactly triggers liquidation?
Liquidation occurs when your margin balance falls below the maintenance margin requirement due to adverse price movement, prompting the exchange to close your position forcibly.
Can I prevent liquidation once it’s initiated?
If you’re quick, you may add more margin to meet requirements, but during high volatility, this might not be feasible. Using stop-loss orders is a safer preventive measure.
Is isolated margin safer than cross margin?
Yes, for most traders. Isolated margin confines risk to a single trade, while cross margin exposes your entire account to potential liquidation from one bad trade.
Do all exchanges have the same liquidation rules?
No. Each exchange has unique policies regarding fees, insurance funds, and margin calculations, leading to different liquidation prices under identical conditions.
How can I check my liquidation price in real-time?
Many exchanges provide built-in calculators or real-time indicators on their trading interfaces. Third-party tools like Coinglass also offer estimates.
What should I do after being liquidated?
Avoid emotional trading. Review what went wrong, adjust your risk management strategy, and consider practicing with lower leverage or demo accounts before returning.
Conclusion
Liquidation isn’t random—it’s often the result of poor risk management and strategy. In volatile crypto markets, a strict risk management framework is essential to avoid significant losses.
By using lower leverage, setting stop-losses, and monitoring market data, you can reduce the likelihood of liquidation and trade more confidently.
In leveraged trading, risk management is more important than profit potential. Always evaluate risks carefully and use available tools to trade sustainably.