Detailed explanation of forced liquidation: How to calculate the liquidation price in USDT contracts

Margin liquidation (commonly referred to as forced liquidation) is the most important risk control mechanism in derivatives trading. When your position losses exceed a certain limit, the system will automatically close your position—that is the meaning of forced liquidation. Understanding the concept of forced liquidation is crucial for safe trading. In simple terms, when the mark price reaches the liquidation price, your position will be forcibly closed.

Core Concepts of Forced Liquidation

Forced liquidation occurs when the mark price hits the liquidation price level, and your position is automatically closed by the system. At this point, the margin balance has fallen below the maintenance margin requirement, meaning your margin is insufficient to sustain the position.

For example, suppose you open a long position with a liquidation price of 15,000 USDT, and the current mark price is 20,000 USDT. When the market drops and the mark price falls to 15,000 USDT, your position will be forcibly liquidated. At this moment, your unrealized loss has reached the level of the maintenance margin, and the system will automatically trigger the liquidation mechanism to prevent further losses.

Why is there a liquidation mechanism? The reason is simple: when you trade with leverage, losses can exceed your invested margin. Forced liquidation ensures that your losses do not grow infinitely, protecting the interests of the exchange and other traders.

Understanding Mark Price and Bankruptcy Price

Forced liquidation involves two key prices: the mark price and the bankruptcy price.

Mark Price is a reference price calculated by the exchange based on the spot index and the combined contract market, used to determine whether a liquidation is triggered. Bankruptcy Price is the price level at which your margin is completely exhausted, representing your maximum loss threshold.

The liquidation price lies between the current market price and the bankruptcy price. When the mark price reaches the liquidation price, you still have some margin available but it is no longer sufficient to maintain the position.

Liquidation Price Calculation in Isolated Margin Mode

In isolated margin mode, you allocate a fixed amount of margin to each position, which is independent of your account balance. This mode offers risk isolation—when a position is liquidated, only the margin allocated to that position is lost, without affecting other positions.

Liquidation Price Formula

For long (buy) positions:

Liquidation Price (Long) = Entry Price - [(Initial Margin - Maintenance Margin) / Contract Quantity] - (Additional Margin / Contract Quantity)

For short (sell) positions:

Liquidation Price (Short) = Entry Price + [(Initial Margin - Maintenance Margin) / Contract Quantity] + (Additional Margin / Contract Quantity)

Where the following concepts are important:

• Position Value = Contract Quantity × Entry Price
• Initial Margin (IM) = Position Value / Leverage
• Maintenance Margin (MM) = Position Value × Maintenance Margin Rate - Maintenance Margin Deduction
• Maintenance Margin Rate (MMR) varies according to risk level

Example Calculations in Isolated Margin Mode

Example 1: 50x Leverage Long Position

Trader opens a 1 BTC long position at 20,000 USDT with 50x leverage, assuming a maintenance margin rate of 0.5% and no additional margin:

• Initial Margin = 1 × 20,000 / 50 = 400 USDT
• Maintenance Margin = 1 × 20,000 × 0.5% = 100 USDT
• Liquidation Price = 20,000 - (400 - 100) = 19,700 USDT

This means if BTC drops to 19,700 USDT, your position will be forcibly liquidated.

Example 2: 50x Leverage Short Position with Additional Margin

Trader opens a 1 BTC short at 20,000 USDT with 50x leverage, then manually adds 3,000 USDT margin:

• Initial Margin = 400 USDT (same as above)
• Maintenance Margin = 100 USDT
• Liquidation Price = [20,000 + (400 - 100)] + (3,000 / 1) = 23,300 USDT

Adding margin significantly raises the liquidation price, giving the short position more room to absorb losses.

Example 3: Adjusting for Funding Fees

If you incur a funding fee of 200 USDT and your available balance is insufficient to cover it, the fee will be deducted from your margin. The liquidation price will then be recalculated:

• Initial Margin = 400 USDT, Maintenance Margin = 100 USDT
• Liquidation Price = [20,000 - (400 - 100)] - (-200 / 1) = 19,900 USDT

This shows that funding fee deductions move the liquidation price closer to the mark price, making the position more prone to liquidation.

Full Margin Mode: Complexity of Liquidation Risk

Compared to isolated margin mode, the calculation of liquidation price in cross margin mode is more complex. In cross margin mode, all positions share a common margin pool, and profits and losses from multiple positions influence each other.

Features of Cross Margin Mode

In cross margin mode, each position’s initial margin remains independent, but the remaining available balance is shared among all positions. This means:

• Losses from one position directly reduce the overall available balance
• The liquidation prices of other positions will change accordingly
• Liquidation occurs only when the available balance reaches zero and maintenance margin is insufficient

Cross Margin Liquidation Price Calculation

For positions with unrealized gains:

LP (Long) = [Current Price - (Available Balance + Initial Margin - Maintenance Margin)] / Net Position Quantity

LP (Short) = [Current Price + (Available Balance + Initial Margin - Maintenance Margin)] / Net Position Quantity

For positions with unrealized losses:

LP (Long) = [Current Mark Price - (Available Balance + Initial Margin - Maintenance Margin)] / Net Position Quantity

LP (Short) = [Current Mark Price + (Available Balance + Initial Margin - Maintenance Margin)] / Net Position Quantity

Cross Margin Example

Single Position Scenario

Trader uses 100x leverage to open a 2 BTC long position at 10,000 USDT, with an available balance of 2,000 USDT:

• Maintenance Margin = 2 × 10,000 × 0.5% = 100 USDT
• Max Loss Tolerance = 2,000 - 100 = 1,900 USDT
• Price drop tolerated = 1,900 / 2 = 950 USDT
• Liquidation Price = 10,000 - 950 = 9,050 USDT

If the price drops to 9,050 USDT, the position will be forcibly liquidated.

Multiple Positions Hedging Scenario

Trader holds:

• Long 2 BTC at 10,000 USDT
• Short 1 BTC at 9,500 USDT

Available balance: 3,000 USDT

Net position = |2 - 1| = 1 BTC

• Initial Margin = (1 × 10,000) / 100 = 100 USDT
• Maintenance Margin = 50 USDT
• LP (Long) = [9,500 - (3,000 + 100 - 50)] / 1 = 6,400 USDT

In this scenario, the short position is unlikely to be liquidated unless losses from the long position increase significantly, reducing the available balance.

Multi-Asset Positions and Liquidation Risks

Holding multiple contracts in cross margin mode increases complexity. For example, holding both BTCUSDT and ETHUSDT positions with an available balance of 2,500 USDT:

BTCUSDT Long Position

• Quantity: 1 BTC, Entry Price: 20,000 USDT, Leverage: 100x
• IM = 200 USDT, MM = 100 USDT
• Unrealized Loss = 500 USDT, Mark Price = 19,500 USDT
• Liquidation Price = 19,500 - (2,500 + 200 - 100) / 1 = 16,900 USDT

ETHUSDT Short Position

• Quantity: 10 ETH, Entry Price: 2,000 USDT, Leverage: 50x
• IM = 400 USDT, MM = 100 USDT
• Unrealized Profit = 100 USDT
• Liquidation Price = 2,000 + (2,500 + 400 - 100) / 10 = 2,280 USDT

If the BTC position’s losses increase, the available balance decreases, raising the risk of liquidation for the ETH position, and vice versa.

Difference Between Forced Liquidation and Settlement

Many traders confuse forced liquidation with settlement. In fact:

• Forced liquidation is the system automatically closing your position
• Settlement is the process the exchange handles after the position is closed

Forced liquidation is an event; settlement is the result. Due to transaction fees, the actual liquidation price may differ slightly, but the core meaning remains: a safety mechanism to protect the market and traders.

How to Avoid Being Forced Liquidated

Understanding the meaning of forced liquidation is only the first step. More important is how to avoid it:

1. Control leverage—using excessively high leverage is a primary cause of forced liquidation
2. Maintain sufficient margin—add margin promptly when your position starts to lose
3. Set stop-loss orders—close positions proactively before reaching the liquidation price to limit losses
4. Monitor risk limits—different risk levels correspond to different maintenance margin rates
5. Diversify positions—avoid over-concentrating capital in a single position

Forced liquidation is a safety net and also a warning. Only by fully understanding the liquidation mechanism can traders navigate leverage trading more confidently.