Liquidation
Liquidation is the forced closing of a leveraged position by a broker or exchange when your collateral no longer covers the required margin.
When you trade with borrowed money or leveraged contracts, the broker or exchange is exposed to your losses. Liquidation is how it protects itself: once your remaining collateral falls below a set level, your position is closed for you — no matter what you think the price will do next. Understanding exactly when and how this happens is essential for anyone using Leverage.
- Category
- Risk Management
- Reading time
- 8 min
- Also called
- Liquidated, Liquidation price, Forced liquidation
- Updated
Liquidation in plain words
Think of the margin you deposit as a cushion. Every loss on a leveraged position comes out of that cushion. Before the cushion is completely gone, the platform steps in and closes the position, so that its own loan or guarantee is not put at risk.
For you, this means the trade ends at a loss you did not choose, at a moment you did not choose — often right before the market turns back. On crypto exchanges this is called getting liquidated; with a stock broker it usually happens after (or instead of) a margin call.
How liquidation happens on a leveraged crypto position, step by step
Crypto derivatives exchanges publish their own rules. The sequence below is common to major platforms; the exact formulas, fees and tiers differ.
You open a position with initial margin
At 10× leverage, $6,000 of margin opens a $60,000 position. The platform sets a maintenance margin: the minimum collateral needed to keep the position open.
Your margin balance moves with the price
The platform tracks your margin balance as your wallet balance plus unrealised profit or loss.1 Every adverse move reduces it.
The position is closed by the liquidation engine
The exchange takes over the position and closes it in the market. A liquidation fee is often charged on top, for example to fund an insurance fund that covers accounts left with negative balances.1
What is left, if anything, returns to you
With isolated margin, you lose the margin allocated to that position. With cross margin, your other funds were supporting the position too, so the loss can be larger.1
Worked examples
Example 1 — A 10× long on bitcoin
LossYou buy a $60,000 bitcoin position with 10× leverage, so your margin is $6,000. The platform’s maintenance margin rate is 0.5% of the position.
- Isolated margin; fees, funding and tiered rates ignored.
- Simplified liquidation price for a long: entry × (1 − 1 ÷ leverage + maintenance rate).
| Initial margin (1 ÷ 10 of $60,000) | $6,000 |
| Liquidation price: $60,000 × (1 − 0.10 + 0.005) | $54,300 |
| Price fall that triggers liquidation | −9.5% |
| Loss on the position at that price | −$5,700 |
| Margin left before fees | $300 |
A 9.5% fall — an ordinary week in bitcoin — cost 95% of the margin, and liquidation fees typically take most of the rest. The remaining buffer exists to protect the exchange, not you.
Example 2 — The same trade at 50×
LossSame $60,000 position, but with 50× leverage, so only $1,200 of margin.
| Initial margin (1 ÷ 50 of $60,000) | $1,200 |
| Liquidation price: $60,000 × (1 − 0.02 + 0.005) | $59,100 |
| Price fall that triggers liquidation | −1.5% |
At 50×, a 1.5% move — which can happen within minutes — is enough. High leverage does not just increase the loss; it removes the room the trade needs to work.
Example 3 — A 10× short
Short sideYou open a $60,000 short at 10× with the same 0.5% maintenance rate.
| Liquidation price: $60,000 × (1 + 0.10 − 0.005) | $65,700 |
| Price rise that triggers liquidation | +9.5% |
For a short the liquidation price sits above the entry. When many shorts are liquidated at once, their forced buying can push the price up further — a short squeeze.
How much room each leverage level leaves you
Try it: estimate a liquidation price
Choose long or short, then enter the entry price, leverage and maintenance margin rate. This uses the simplified formula above; your platform’s own calculator is the reference for real positions.
| Initial margin (1 ÷ leverage) | 10.00% of the position |
| Estimated liquidation price (long) | $54,300.00 |
| Distance from entry | 9.50% down |
A move of about 9.50% against you is enough. Real platforms use tiered maintenance rates, fees and a mark price, so their figure will differ — treat this as an order of magnitude, not a promise.
Forced selling in a margin account vs. liquidation on a crypto exchange
| Aspect | Stock margin account | Crypto derivatives platform |
|---|---|---|
| Trigger | Equity below the maintenance requirement3 | Margin balance below maintenance margin, measured at the mark price1 |
| Warning | A margin call is common but not required3 | Usually automatic; some platforms send alerts as you approach it |
| Who chooses what is sold | The firm4 | The liquidation engine, sometimes in partial steps2 |
| Can you owe money afterwards? | Yes, if proceeds do not cover the loan3 | Usually covered by an insurance fund, depending on the platform1 |
Why liquidation exists — and why traders study it
It protects the lender or exchange
Liquidation ensures a broker or exchange is repaid before a trader’s losses exceed the collateral.
It protects other traders
By closing failing positions early, exchanges reduce the chance that one account’s losses spill over to others.
It explains sudden market moves
Large clusters of liquidations can accelerate a fall or a rise, creating long squeezes and short squeezes.
It sets a hard limit on your plan
Your stop loss must sit well before your liquidation price, or the platform will make the exit decision for you.
Advantages and disadvantages
Advantages
- Limits losses in many crypto products to the margin assigned to a position (with isolated margin).
- Protects the platform and other users from unpaid losses.
- Rules and estimated liquidation prices are published, so you can plan around them.
Going deeper
Read as far as you need. Each level builds on the one before it.
Your liquidation price is not your stop loss
Beginner
A liquidation is a failure of risk management, not a form of it. Decide where your idea is wrong, place a stop loss there, and make sure the liquidation price is far beyond it. If it is not, reduce the leverage or the size.
Mark price, maintenance tiers and cross margin
Intermediate
Liquidation uses the mark price rather than the last traded price, which reduces liquidations caused by brief spikes on a single exchange.2 It also means your position can be liquidated even if the chart you are watching never printed your liquidation price.
Maintenance margin rates usually rise with position size, so large positions are liquidated sooner. With cross margin, the liquidation price of each position shifts as your other positions gain or lose.1
Cascades, insurance funds and auto-deleveraging
Advanced
Liquidations add market orders in the direction of the move: long liquidations sell into a falling market, short liquidations buy into a rising one. When many positions share similar liquidation levels, this can create a cascade.
Exchanges charge liquidation fees into an insurance fund that absorbs losses when a position cannot be closed before its margin is exhausted.1 If that fund is not enough, some platforms reduce the positions of profitable traders on the other side (auto-deleveraging) — another platform-specific risk to read about before trading.
Common mistakes
Using maximum leverage because it is available
The maximum a platform allows tells you nothing about what is sensible. Every extra step of leverage moves the liquidation price closer.
Adding margin to rescue a losing position
Topping up margin moves the liquidation price away, but it also increases how much you can lose on a trade that is already wrong.
Ignoring funding and fees
Funding payments and fees reduce your margin over time, which slowly moves the liquidation price toward the current price.
Using cross margin without understanding it
In cross mode, one bad position can draw on your whole balance. Isolated margin limits each position’s damage.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Liquidation is the forced closing of a leveraged position when collateral falls below the maintenance requirement.
- On crypto exchanges it is triggered by the mark price; on stock margin accounts it follows a breach of the maintenance requirement.
- Approximate room before liquidation ≈ 1 ÷ leverage − maintenance rate, before fees.
- Liquidation fees take part of the remaining margin; in margin accounts you can still owe money.
- Keep your stop loss well before your liquidation price.
Frequently asked questions
Why was I liquidated when the price on my chart never reached my liquidation price?
Can I lose more than my margin when I am liquidated?
Is liquidation the same as a margin call?
How do I avoid liquidation?
Further learning
- Leverage
Liquidation risk grows directly with leverage.
- Margin
Initial and maintenance margin are the numbers that set the liquidation price.
- Stop Loss
The exit that should always come before liquidation.
- Perpetual Futures
The crypto product where liquidations are most common.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Binance. Three Misconceptions About Liquidations in Binance Futures (opens in a new tab) Checked .
- OKX. How does liquidation work in futures trading? (opens in a new tab) Checked .
- Investor.gov (SEC). Investor Bulletin: Understanding Margin Accounts (opens in a new tab) Checked .
- FINRA. Know What Triggers a Margin Call (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Margin Call (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.