Liquidation Price Mechanism: How to Protect Your Position from Forced Closure

Liquidation is a critical moment when the trading platform automatically closes your position. This occurs when the mark price reaches the set liquidation price, and your margin balance falls below the required maintenance margin level. Understanding the liquidation mechanism and how its price is calculated is a key skill for managing risks when trading with leverage.

Imagine the situation: you opened a position with a liquidation price set at $15,000, and the current market price is $20,000. If the price drops to $15,000, your position will automatically close because the unrealized loss approaches the limit that your margin can cover. This is when the liquidation process is triggered.

What happens during position liquidation

Liquidation is not a penalty but a safeguard mechanism for the platform and other market participants. When the liquidation price is reached, the system automatically closes the position at the bankruptcy price (at a margin level of 0%). This means your margin balance can no longer support the open position.

Key points:

• The position is closed automatically, without your participation
• Closure occurs at the bankruptcy price, which may lead to additional losses
• The process limits your maximum losses depending on your margin size

Calculating the liquidation price in isolated margin mode

In isolated margin mode, the margin allocated to a specific position is completely separated from your overall account balance. This provides predictable risk: maximum losses are limited only to the amount you allocated for that position.

Formulas for calculating the liquidation price

For long positions:

Liquidation Price (long) = Contract Quantity / [Position Value + (Initial Margin - Maintenance Margin)]

For short positions:

Liquidation Price (short) = Contract Quantity / [Position Value - (Initial Margin - Maintenance Margin)]

Breakdown of formula components

• Position Value = Contract Quantity / Entry Price
• Initial Margin = Position Value / Leverage
• Maintenance Margin = (Position Value × Maintenance Margin Rate) - Maintenance Margin Deduction

Note: The maintenance margin rate varies depending on the risk limit set and the contract type.

Practical examples of liquidation price calculations

Example 1: Long position with high leverage

Trader opens a BTCUSD long position worth $100,000 at an entry price of $50,000, using 50x leverage. Maintenance margin rate is 0.5%.

Calculations:

• Position value = 100,000 / 50,000 = 2 BTC
• Initial margin = 2 / 50 = 0.04 BTC
• Maintenance margin = 2 × 0.5% = 0.01 BTC
• Liquidation price = 100,000 / [2 + (0.04 - 0.01)] = $49,261.08

At this level, the price of your position reaches the critical close-out point.

Example 2: Short position with conservative leverage

Trader opens a short BTCUSD position of $60,000 at an entry of $50,000, with 10x leverage. Maintenance margin rate is 0.5%.

Calculations:

• Position value = 60,000 / 50,000 = 1.2 BTC
• Initial margin = 1.2 / 10 = 0.12 BTC
• Maintenance margin = 1.2 × 0.5% = 0.006 BTC
• Liquidation price = 60,000 / [1.2 - (0.12 - 0.006)] = $55,248.61

Example 3: Impact of funding fees on liquidation price

Trader holds a long BTCUSD position worth $100,000 (as in example 1) with an initial liquidation price of $49,261.08. However, they need to pay a funding fee of 0.01 BTC.

If there are insufficient funds to cover this fee, it is deducted from the position margin. This brings the liquidation price closer to the current market price, increasing the risk of forced closure:

New liquidation price = 100,000 / [2 + (0.04 - 0.01 - 0.01)] = $49,504.95

See how even a small fee can significantly affect the liquidation point?

Calculating the liquidation price in cross margin mode

In cross margin mode, the initial margin for each position is allocated separately, but remaining funds on the account are shared across all positions. This means the liquidation price constantly changes depending on unrealized profits and losses across all open positions.

Main difference: in cross margin mode, you have an additional “buffer” in the form of available balance, reducing the risk of liquidation but increasing potential losses.

Formulas for cross margin mode

For long positions:

Liquidation Price (long) = Contract Quantity / [Position Value + (Initial Margin - Maintenance Margin) + Available Funds]

For short positions:

Liquidation Price (short) = Contract Quantity / [Position Value - (Initial Margin - Maintenance Margin) + Available Funds]

Available funds are the remaining balance after reserving initial margin for each open position.

Real example in cross margin mode

Trader opens a BTCUSD long position of $50,000 at an entry of $25,000 with 20x leverage. The account has 0.5 BTC free funds. Maintenance margin rate is 0.5%.

Calculations:

• Position value = 50,000 / 25,000 = 2 BTC
• Initial margin = 2 / 20 = 0.1 BTC
• Maintenance margin = 2 × 0.5% = 0.01 BTC
• Available funds = 0.5 BTC

Liquidation price = 50,000 / [2 + (0.1 - 0.01) + 0.5] = $17,857.14

Note: in cross margin mode, the liquidation price is significantly lower than in isolated margin mode. The additional 0.5 BTC on the account provides more protection. However, if losses occur on other positions, this reduces the available balance and brings the liquidation price closer to the current market price.

Key differences between modes

Important notes on calculations

• Closing fees may cause slight differences between calculated and actual liquidation prices
• Paying funding fees from position margin shifts the liquidation price upward
• In cross margin mode, the liquidation price can change multiple times within a day due to fluctuations in unrealized profit/loss

Understanding how the liquidation price is calculated allows you to manage position sizes properly, choose optimal leverage, and avoid unnecessary risks. Regularly check your current liquidation price on your trading platform, especially if you are using high leverage.