Forced liquidation, often called "强平" (qiǎng píng) in Mandarin, is a critical concept in cryptocurrency contract trading. It occurs when a trader's position is automatically closed by the exchange due to insufficient margin, preventing further losses. Understanding this mechanism helps traders manage risk and protect their capital.
When you open a leveraged position, you deposit initial margin. If the market moves against you, your unrealized loss increases, and your remaining margin decreases. If it drops below the required maintenance margin level, the system triggers forced liquidation. Your remaining margin is then used to cover the loss, and any leftover funds may be transferred to the exchange's risk reserve fund.
How Liquidation Prices Are Calculated
The liquidation price depends primarily on the maintenance margin rate—the minimum margin percentage required to keep a position open. This rate varies by exchange and asset. Lower rates allow more price fluctuation before liquidation occurs.
Other factors include:
- Leverage level: Higher leverage means a higher liquidation price.
- Position direction: Long or short.
- Entry price: The initial trade execution price.
Different platforms use similar formulas but set varying maintenance margin rates. This leads to differences in liquidation prices across exchanges for the same trade setup.
Comparing Exchange Liquidation Mechanisms
A comparison of major exchanges reveals key differences in their approaches. For BTC/USDT contracts, maintenance margin rates typically range from 0.5% to 2.5%. This significantly impacts how soon a position gets liquidated during adverse price movements.
ETH contracts show even more pronounced differences due to their higher volatility. Some platforms adjust their maintenance margin requirements dynamically based on market conditions, adding another layer of complexity.
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Most major platforms use a similar core formula. However, one prominent exchange sets its maintenance margin rate as high as 2.5%, resulting in a significantly higher liquidation price compared to others. This means a trader holding the same position on multiple exchanges would see their position on this platform liquidated first.
This strategic difference highlights how exchanges balance risk management with user experience. Some prioritize protecting their systems from cascading liquidations, while others aim to give traders more breathing room.
The Role of Risk Reserve Funds
After liquidation, any remaining margin from the position is often transferred to the exchange's risk reserve fund. This fund serves as a protective buffer for the platform and its users.
What is a risk reserve fund?
This fund covers losses when a user's account equity falls below zero (a situation called "穿仓" or breach). It prevents the exchange from having to socialize losses among profitable traders through a process called "auto-deleveraging" (ADL), which can create negative trading experiences.
How Exchanges Handle Liquidation Surplus
Platforms differ in their treatment of leftover margin after liquidation:
- Most transfer 100% of remaining funds to their risk reserve.
- A minority return a portion (e.g., 50%) to the user while allocating the rest to the fund.
This approach creates a dual benefit:
- For the exchange: It builds a financial cushion against extreme market events.
- For users: It reduces the occurrence of auto-deleveraging, protecting profitable positions from being partially closed to cover others' losses.
However, this mechanism can create misaligned incentives. An exchange that profits directly from liquidations might be less motivated to implement features that help traders avoid them. The most sustainable platforms prioritize long-term user retention over short-term gains from frequent liquidations.
A platform that offers lower liquidation prices and returns part of the residual margin demonstrates confidence in its overall risk management system. It aligns its success with user success—profiting from continuous trading activity rather than from occasional catastrophic losses.
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Frequently Asked Questions
What exactly triggers forced liquidation?
Forced liquidation triggers when your account's equity (initial margin minus unrealized loss) falls below the maintenance margin requirement. The exchange closes your position automatically to prevent debt to the platform.
Can I avoid being liquidated?
Yes. You can add more margin to your position (increase collateral), partially close the position to reduce risk, or set stop-loss orders at a level before your liquidation price to maintain control.
What happens to my money after liquidation?
The exchange uses your remaining margin to cover the loss on your position. Any surplus is typically sent to the platform's risk reserve fund, though some exchanges may return a portion to you.
Why do liquidation prices differ between exchanges?
Each exchange sets its own maintenance margin rate and risk model. Higher rates mean less room for price movement against you, leading to earlier liquidation. Always check an exchange's specific parameters before trading.
Is trading on an exchange with a lower liquidation price always better?
Not necessarily. A very low liquidation price might indicate a higher risk of cascading liquidations or system-wide issues during extreme volatility. The best exchanges offer a balanced approach: reasonable margin requirements paired with robust risk management.
How does leverage affect my liquidation price?
Higher leverage significantly increases your liquidation price. For a long position, higher leverage brings the liquidation price closer to your entry price, leaving you with less downside protection. Always use leverage cautiously.