Liquidation

Leverage lets you control a position larger than your collateral. If the market moves against you far enough, your position is liquidated to prevent your losses from exceeding your margin.

Margin ratio and maintenance margin

Every account has a margin ratio measuring collateral against the size of open positions. Each position also has a maintenance margin — the minimum collateral required to keep it open. When your margin ratio falls to the maintenance level, the position becomes eligible for liquidation.

The check uses the mark price — a smoothed reference price — rather than the last traded price, so a brief wick doesn’t liquidate you on its own.

What happens in a liquidation

• In cross margin, your shared collateral backs every cross position, so a liquidation draws on your whole cross balance. Positions may be reduced or closed to restore a safe margin ratio.
• In isolated margin, only the margin assigned to that position is at risk. The rest of your account is untouched.

A liquidation closes the position at the prevailing market price, which may be worse than your liquidation price in fast markets.

The insurance fund

An insurance fund backstops the system. When a liquidation can’t fully cover a position’s losses, the fund absorbs the shortfall so that other traders’ balances are protected. The fund is replenished over time from a portion of liquidation proceeds.

Avoiding liquidation

• Use lower leverage to widen the distance to your liquidation price.
• Add margin to a position that’s moving against you.
• Set stop-loss orders to exit on your own terms before liquidation.
• Watch your margin ratio, especially in volatile markets.