What is liquidation?

The forced closing of a leveraged position when its collateral falls below the level the platform requires.

The exchange or protocol closes the position automatically and the trader loses the margin posted. Liquidations cluster during sharp price moves and can make them sharper.

Nobody calls you first. It is an automated process that runs against a published rule, at a price you can calculate in advance, and the most common cause of surprise is not knowing that number before opening the position.

How it works

Your position has an equity figure: the collateral you posted plus or minus the running profit or loss. The venue publishes a maintenance requirement, a percentage of notional you must keep. When equity falls to that level, the liquidation engine takes over.

What it does varies. Some venues close the whole position at market. Others use partial liquidation, closing enough to restore the requirement and leaving the rest open. Many charge a liquidation fee on top, so the outcome is worse than simply losing the equity difference.

Three details decide whether you are liquidated on a given move.

1. The trigger price is derived from the mark price, not from the last trade on that venue's own book. That is deliberate: it stops a large trader pushing one order book to trigger liquidations.
2. Margin mode changes the distance. Isolated margin liquidates against the assigned collateral only; cross margin draws on the whole account balance and survives much further.
3. Fees and funding erode equity continuously, so a position can drift into liquidation without the price moving against it at all.

Liquidations are self-reinforcing. A cascade of forced sells pushes the price lower, which triggers the next tier of positions, which pushes it lower again. That is why a violent move overshoots and then retraces, and why depth on the book matters more in those minutes than at any other time.

On lending protocols the same word describes a related process: when a borrower's collateral ratio falls to the threshold, anyone can repay part of the debt and take collateral at a discount.

Example

Illustrative arithmetic. You open a $10,000 notional long with $1,000 of isolated collateral, so 10 times leverage. The maintenance requirement is 1 percent of notional, which is $100.

Your equity starts at $1,000 and falls dollar for dollar with the position. It reaches $100 after $900 of loss, which is a 9 percent adverse move on the underlying. At that point the engine closes you, a liquidation fee is deducted, and you are left with little or nothing of the $1,000. If the price recovers an hour later, you are not in the trade. A spot buyer who bought the same asset outright would be down 9 percent and still holding.

Why it matters when you buy

A spot purchase cannot be liquidated, which is worth stating because it is the main structural difference between buying an asset and trading it with leverage. Leveraged products are also restricted for retail customers in a number of countries, shown on the jurisdiction pages. For an ordinary purchase, the fee comparison and the liquidity view are the numbers that affect what you pay.

Related terms

• maintenance margin: the level that triggers it
• initial margin: what you post at the start
• mark price: the reference the trigger uses
• insurance fund: what covers a shortfall
• auto deleveraging: what happens when that fund empties
• liquidation threshold: the lending protocol equivalent

Questions

Can I be liquidated if the price never reaches my liquidation price on this exchange?

Yes. The trigger uses a mark price derived from an index of outside venues, so it can move even when this exchange's own book has not traded there.

Do I lose everything?

Usually most of the collateral backing that position, plus a liquidation fee. Partial liquidation on some venues closes only part of the position and leaves the remainder open.

Can I avoid it?

Add collateral, reduce size, or use less leverage. Once equity reaches the maintenance level the process is automatic and there is nothing to negotiate.