Understanding and Calculating of Liquidation

In crypto trading, liquidation occurs when the margin in your account falls below the required maintenance margin, and your position is automatically closed to prevent further losses. Calculating the liquidation price is crucial for effective risk management, helping traders anticipate potential risks and make informed decisions.

Liquidation Price Formulas

The liquidation price differs for long and short positions:

• For Long Positions:
  Liquidation Price = Average Entry Price - [(Initial Margin - Maintenance Margin) / Order Quantity]
• For Short Positions:
  Liquidation Price = Average Entry Price + [(Initial Margin - Maintenance Margin) / Order Quantity]

Key Terms Explained

1. Average Entry Price: The price at which you enter a position.
2. Initial Margin (IM): The amount of collateral used to open a position.
   • Formula:
     Initial Margin = Entry Price × Order Quantity × Initial Margin Rate
3. Maintenance Margin (MM): The minimum amount of collateral required to keep the position open.
   • Formula:
     Maintenance Margin = Contract Size × Entry Price × Maintenance Margin Rate
4. Order Quantity: The size of your position in the underlying asset.

Leverage, Initial Margin Rate, and Maintenance Margin Rate Categories

The table below outlines the maximum leverage and corresponding margin rates per category. For the specific category for each symbol, refer to Contracts Category.

Please note that details of the contracts category may be adjusted based on market conditions.

Example 1: Calculating Long Liquidation Price

Scenario:

• Position: Long

• Average Entry Price: 90,000 USDT

• Order Quantity: 1 BTC

• Leverage: 100x (Category 1st)

• Initial Margin Rate: 1%

• Maintenance Margin Rate: 0.5%

Steps:

1. Calculate the Initial Margin (IM):
   IM = Entry Price × Order Quantity × Initial Margin Rate

   IM = 90,000 × 1 × 1% = 900 USDT

2. Calculate the Maintenance Margin (MM):
   MM = Entry Price × Order Quantity × Maintenance Margin Rate

   MM = 90,000 × 1 × 0.5% = 450 USDT

3. Apply the Long Liquidation Price Formula:
   Liquidation Price = Entry Price - [(IM - MM) / Order Quantity]

   Liquidation Price = 90,000 - [(900 - 450) / 1] = 89,550 USDT

Result:

The liquidation price for this long position is 89,550 USDT

Example 2: Calculating Short Liquidation Price

Scenario:

• Position: Short

• Average Entry Price: 1.65 USDT

• Order Quantity: 200 APE

• Leverage: 20x (Category 7th)

• Initial Margin Rate: 5%

• Maintenance Margin Rate: 2%

Steps:

1. Calculate the Initial Margin (IM):
   IM = Entry Price × Order Quantity × Initial Margin Rate

   IM = 1.65 x 200 x 5% = 16.5 USDT

2. Calculate the Maintenance Margin (MM):
   MM = Entry Price × Order Quantity × Maintenance Margin Rate

   MM = 1.65 x 200 x 2% = 6.6 USDT

3. Apply the Short Liquidation Price Formula:
   Liquidation Price = Entry Price + [(IM - MM) / Order Quantity]

   Liquidation Price = 1.65 + [(16.5 - 6.6) / 200] = 1.6995 USDT

Result:

The liquidation price for this short position is 1.6995 USDT

What Happens to The Margin After Liquidation?

When a position is liquidated:

Initial Margin: The margin provided is used to cover the loss.

Remaining Margin: If there is any remaining margin after deducting the losses, it is transferred to the platform’s Insurance Fund.

An insurance fund is a reserve set aside by a cryptocurrency exchange or trading platform to protect against losses from liquidations, unexpected events, or other risks. For more information, visit our Insurance Fund article.

Tips for Managing Liquidation Risks

1. Monitor Leverage and Margin Rates: Higher leverage increases the risk of liquidation. Adjust your leverage wisely based on your risk tolerance.

2. Add Funds to Maintain Margin: To avoid liquidation, consider adding funds to your position if the market moves against your favor.

3. Set Stop Loss Orders: A stop-loss order can help protect your position by automatically closing it before reaching the liquidation price.

4. Diversify Positions: Avoid putting all your capital into one position. Diversification reduces the impact of a single market movement.

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