Liquidation
Liquidation is the forced closing of a position by the exchange once the collateral no longer covers the loss. The timing is not yours: the position is closed automatically and the margin you put up is gone.
How it works
Trading with leverage, you post margin, your share of the position, and the exchange supplies the rest. Losses come out of your share, so at 10× a 1% move in price eats 10% of your margin.
The exchange sets a maintenance margin, the floor below which a position cannot be held. The moment your own funds fall under it, liquidation fires and the position is closed at market without you.
Liquidations feed on themselves. A mass of forced long closures is a wave of market selling, which pushes the price lower and triggers the next round. That is how moves that normally take days happen in minutes.
A worked example
You open a $10,000 long on bitcoin at 10× with $1,000 of your own. Entry at $64,000, maintenance margin 0.5%.
| Position size | $10,000.00 |
| Your margin | $1,000.00 |
| Move until liquidation | ≈ 9.5% |
| Liquidation price | ≈ $57,920 |
A 9.5% fall is enough to take the whole thousand. At 20× it takes 4.5%, at 50× just 1.5%. Bitcoin covers moves like that in hours, sometimes in minutes.
How to avoid it
- Know the liquidation price before enteringThe exchange shows it immediately. If it sits inside the normal daily range, the leverage is too high.
- Put the stop above itA stop closes at your price and leaves part of the margin. Liquidation leaves nothing.
- Isolated margin, not crossCross margin puts the whole account balance at risk rather than only the amount you meant to risk.
- Remember fundingPerpetual contracts charge a funding rate every few hours. It quietly walks the liquidation price toward you.
- A thin market hits twiceThe close goes through at market, and on an illiquid pair slippage makes the loss larger than the arithmetic said.