Definition
Liquidation is the forced closing of a leveraged position by an exchange or protocol when the account's margin falls below the required maintenance level.
How it works
Opening a leveraged position requires initial margin; keeping it open requires maintenance margin, a smaller minimum set as a percentage of the position value. As the price moves against the position, losses reduce the margin. When the remaining margin reaches the maintenance level, the exchange's system closes the position, fully or in steps, so that losses do not exceed the deposit.
For an isolated long position, a rough estimate is: liquidation price ≈ entry price × (1 − 1 ÷ leverage + maintenance margin rate). For a short, the signs flip: entry price × (1 + 1 ÷ leverage − maintenance margin rate). Exchanges use their own formulas, tiers and fees, and most check the mark price rather than the last trade, so the exact level is the one shown on the exchange's position screen. A liquidation fee may take part of whatever margin is left.
The margin mode changes what is at risk. With isolated margin, only the margin assigned to that position can be lost. With cross margin, the whole account balance supports open positions, which can delay liquidation but puts more money at risk. A stop-loss set before the liquidation price usually closes the trade with a smaller, planned loss instead.
Example (hypothetical numbers)
Suppose you open a 10x isolated long in Coin A at $100 with $1,000 of margin (a $10,000 position, 100 coins), and the maintenance margin rate is 0.5%.
Liquidation price ≈ $100 × (1 − 1 ÷ 10 + 0.005) = $100 × 0.905 = $90.50, a fall of 9.5%.
At $90.50 the loss is 100 × $9.50 = $950, leaving about $50 of margin, which is the 0.5% maintenance level on $10,000.
At 20x leverage the same formula gives $100 × (1 − 0.05 + 0.005) = $95.50, only 4.5% below the entry.
The example shows that higher leverage moves the liquidation price closer to the entry price.
Common mistakes
- Assuming the exchange will warn you or wait before liquidating a position.
- Using cross margin without realizing the whole account balance can be lost.
- Treating the liquidation price as a stop-loss, even though fees and fast markets can make the outcome worse.
- Calculating the liquidation price with a formula taken from a different exchange.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.