L'INFORMATEUR CRYPTOLiquidation: definition
A liquidation is the forced closing of a leveraged position by the exchange once losses have eaten up the deposited margin.
Definition
When you trade with leverage, you post a margin. If the price moves against you so much that the loss approaches that margin, the exchange closes your position by force: that's a liquidation. You lose the margin committed to the trade.
Simplified liquidation price
In isolated margin, a x10 long is liquidated after a drop of about 10% (slightly less because of fees and maintenance margin). At x50, about 2% is enough. At x100, about 1%.
Liquidation cascades
A liquidation is a forced market order: it pushes the price in the same direction, which can liquidate other positions. That's where violent wicks come from, especially when open interest and funding are high.
How to avoid it
- Always set a stop loss well before the liquidation price.
- Reduce leverage and position size.
- Use isolated margin to limit the loss to the position concerned.
Frequently asked questions
Can you lose more than your margin?
In isolated margin, no: the loss is limited to the position's margin. In cross margin, the whole account balance can serve as collateral and be lost.
Does a stop loss protect against liquidation?
Yes, if it's placed before the liquidation price: the position is closed with a controlled loss before the exchange liquidates it.