What Is Liquidation?
Liquidation, also known as forced liquidation or a margin call, occurs when a trading platform automatically closes a user’s position. This mechanism is triggered to prevent further losses when a trader’s equity can no longer cover the required margin. In futures trading, the Maintenance Margin Ratio (MMR) serves as a key risk indicator. When the MMR reaches or exceeds 100%, the system will initiate liquidation. Traders are advised to monitor their MMR closely to avoid unwanted liquidation events.
What Triggers Liquidation?
Liquidation is typically triggered when the mark price—a calculated fair price used to avoid market manipulation—reaches the liquidation price. Using the mark price as a reference enhances market stability and reduces unnecessary liquidations during periods of high volatility.
On most trading interfaces, users can view the real-time mark price alongside other pricing data like the last traded price and index price. This helps traders make informed decisions and anticipate potential liquidation levels.
How Does the Liquidation Process Work?
When liquidation is triggered, the system follows a structured process to manage risk in a controlled manner. This often involves a tiered approach to minimize the impact on the trader’s account.
Order Cancellation
- In cross-margin mode, all pending orders for the account are canceled.
- In isolated margin mode with auto-margin replenishment enabled, all pending orders for that specific contract are canceled.
- If the Maintenance Margin Ratio remains at or above 100% after order cancellation, the system proceeds to the next step.
Offsetting Positions
- In cross-margin mode, if a user holds both long and short positions, the system may offset them to reduce risk.
- This step is exclusive to cross-margin mode. If the MMR stays at or above 100%, the system continues.
Tiered Liquidation
- Positions are grouped into risk tiers based on their size and exposure.
- If a position is in a higher risk tier, the system partially liquidates it at the bankruptcy price to lower the risk tier.
- This step repeats until the position is reduced to the lowest risk tier or the MMR falls below 100%.
Final Liquidation
- When a position is in the lowest risk tier and the MMR is ≥100%, the remaining position is taken over by the liquidation engine at the bankruptcy price.
- Note: Liquidation is handled by the liquidation engine, not the matching engine, so the bankruptcy price does not appear in trade history or candlestick charts.
Post-Liquidation Handling
After a position is taken over at the bankruptcy price:
- If the position can be executed at a better price, the surplus is added to the insurance fund.
- If execution is worse than the bankruptcy price, the loss is covered by the insurance fund.
- If the insurance fund is insufficient, the position may be handled by an Auto-Deleveraging (ADL) system.
How to Check Liquidation Orders
Liquidation orders can typically be found in the “Position History” section of your trading account.
On Mobile App
- Path 1: Open the futures trading section, tap the order icon, and navigate to “Position History.”
- Path 2: Go to the assets page, select futures, and access “Position History” from there.
On Web Platform
- Log in to your account, click on “Orders” in the navigation bar, and select “Futures Orders.”
- Under “History” or “Position History,” you can review liquidation orders.
Is Liquidation Price the Same as Bankruptcy Price?
In position history and profit/loss statements, the displayed liquidation price is often the bankruptcy price. The bankruptcy price is the point at which a trader’s initial margin is entirely lost. The liquidation price serves as the trigger, but the actual execution occurs at the bankruptcy price. This means that after liquidation, the trader’s margin balance is reduced to zero.
Why Isn’t the Liquidation Price Shown on the Chart?
Since liquidations are processed by the liquidation engine and not the matching engine, the bankruptcy price does not appear in public trading data or candlestick charts. Profits or losses from liquidations are settled with the insurance fund. This is a risk management feature designed to prevent excessive market impact and avoid triggering Auto-Deleveraging (ADL).
Example:
A liquidation order shows:
- Mark price reaches liquidation price: 0.962 USDT
- Position size: 2,619 ADA
- Bankruptcy price: 0.9581 USDT
The position is liquidated at the bankruptcy price, which is not visible on public charts.
How Does Maintenance Margin Ratio Affect Liquidation?
The Maintenance Margin Ratio (MMR) is determined by the size of a position, not the leverage used. Larger positions are categorized into higher risk tiers with higher MMR requirements. Think of MMR as a “locked” portion of margin reserved for risk management. The larger the position, the higher the MMR, and the more margin is locked.
Example: If a user has an MMR of 1% and uses 100 USDT as margin, 1 USDT is locked. If losses reach 99 USDT, the position is liquidated. This system helps platforms manage risk more effectively.
The Relationship Between Leverage and Liquidation Price
- Cross-Margin Mode: Leverage affects the amount of margin required but does not directly determine the liquidation price. The liquidation price depends on the total account balance and open positions.
- Isolated Margin Mode: If margin isn’t adjusted after opening a position, higher leverage brings the liquidation price closer to the entry price, increasing liquidation risk.
Example of Effective Leverage in Cross-Margin:
- Account balance: 10 USDT
- Position size: 10 USDT with 10x leverage
- Initial margin used: 1 USDT
- Effective leverage = Account balance / Position size = 1
This shows that in cross-margin mode, overall account equity influences liquidation more than leverage alone.
Why Does Liquidation Value Differ from Initial Position Value?
In USDT-margined futures trading, if your position is denominated in USDT (not coin quantity or lots), the liquidation value in your history may differ from the initial value. Although the number of coins remains constant, their value fluctuates with price changes. The liquidation value is calculated based on the coin quantity multiplied by the average execution price at liquidation, which often differs from the initial value due to market movements.
Frequently Asked Questions
What is the difference between mark price and last price?
The mark price is a fair value estimate based on index prices and funding rates, used to prevent market manipulation. The last price is the most recent transaction price. Exchanges use mark price for liquidation to ensure fairness during volatile periods.
How can I avoid liquidation in futures trading?
Use risk management tools like stop-loss orders, monitor your margin ratio regularly, avoid over-leveraging, and consider using lower leverage or hedging strategies to protect your positions.
Does higher leverage always mean higher liquidation risk?
In isolated margin mode, yes—higher leverage brings liquidation closer to your entry price. In cross-margin mode, your total account balance is considered, so leverage has less direct impact on liquidation price.
What happens if the insurance fund is depleted?
If the insurance fund cannot cover liquidation losses, the exchange may activate an Auto-Deleveraging (ADL) system, which closes opposing positions of profitable traders to cover the deficit.
Can I recover funds after liquidation?
Once liquidated, your margin is lost. However, some platforms offer risk management features like partial liquidation or insurance fund protection to minimize losses.
Why did my position liquidate even though the market price didn’t hit my liquidation price?
Exchanges use mark price, not market price, for liquidation triggers. If the mark price reaches your liquidation level, your position will be closed even if the market price hasn’t reached it yet.
For a deeper understanding of risk management and liquidation mechanisms, 👉 explore advanced trading strategies.