Trading term

What is Liquidation?

Liquidation is the exchange force-closing a leveraged position because the trader's margin can no longer cover the loss. It isn't a warning or a request for more money — the position is sold at market on your behalf, and the margin behind it is gone.

Every leveraged position has a liquidation price: the level at which the loss has eaten almost all of the margin backing it. Reach that price and the venue's risk engine closes the position automatically, at whatever the market will pay. There is nothing to accept or decline, and on a fast move there is usually no time to send more margin.

The liquidation price arrives slightly BEFORE the money actually runs out, because the venue keeps back a maintenance margin — a small percentage of the position it will not let you lose. That buffer exists so the forced sale still covers the loss; without it, a gap through your liquidation price would leave a shortfall the exchange has to eat. The higher the leverage, the closer that price sits: at 10x a long is liquidated on roughly a 9.5% move against it, and at 100x on roughly half a percent.

Liquidations are also self-reinforcing. Each forced close is a market order in the same direction as the move that caused it, which pushes price a little further and can reach the next trader's liquidation price. That chain is a liquidation cascade, and it is why crowded leverage produces moves far larger than the news that started them.

For example

A trader posts $1,000 of margin at 10x on a Bitcoin perpetual bought at $100,000, controlling $10,000 of exposure. With a 0.5% maintenance margin rate, the liquidation price is about $90,500 — a 9.5% fall, not the 10% a simple 'I can lose my margin' calculation suggests.

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Why it matters to you

The liquidation price is the single number that decides whether a leveraged position survives an ordinary bad day. It is set entirely by your own leverage, which means it is the one risk on the page you fully control before you enter. Traders who size a position by how much they want to make rather than by where it liquidates are the ones a routine move removes from the market.

⚠ It's closer than 100 ÷ your leverage

Most people work out their wipe-out level as 100 divided by leverage — 10% at 10x, 1% at 100x. The real liquidation price is nearer than that, because the maintenance margin is deducted first. Mistaking the two means believing you have room that the venue has already reserved.

Frequently asked questions

What does liquidation mean in trading?

Liquidation is when an exchange or broker force-closes a leveraged position because the margin behind it can no longer cover the loss. The position is sold at market automatically and the margin is lost. It is not a margin call asking for more funds — it has already happened by the time you see it.

How is the liquidation price calculated?

For a long, roughly: entry price x (1 - 1/leverage + maintenance margin rate). The 1/leverage term is how much of a move your margin covers; subtracting the maintenance margin rate is the buffer the venue keeps back, which pulls the liquidation price slightly closer than a simple calculation suggests.

Can you lose more than your margin?

On most large crypto venues, no — the maintenance margin buffer and an insurance fund are designed so the forced sale covers the loss, and your downside is capped at the margin posted. In a violent gap it can still fail, which is what insurance funds and, in the worst case, socialised-loss mechanisms exist to absorb.

What is a liquidation cascade?

A chain reaction. Each forced close sells into a falling market, pushing price down far enough to trigger the next trader's liquidation, which sells again. Crowded one-way leverage turns an ordinary move into a much larger one — on 10 October 2025 about $19bn of positions were liquidated in 24 hours this way.

How do you avoid being liquidated?

Use less leverage, so the liquidation price sits further from the market than the instrument's normal daily range. A stop-loss placed well inside the liquidation price also closes the trade on your terms rather than the venue's. Adding margin works only if you have time, and on a fast move you usually don't.

Read the full guide

DerivativesWhat Is a Perpetual Future? The Contract That Never ExpiresA perpetual future is a futures contract with the expiry date deleted. Something has to do the job that expiry did, and that something is the funding rate — a payment you make every eight hours, forever. Here's how perps work, what funding really costs, and why liquidation arrives sooner than the maths suggests.11 min read

Related terms

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