Preface

In the Crypto Assets market, Futures Trading has long been a daily routine for many on-chain traders. The characteristics of high leverage, high volatility, and high risk attract speculators who want to amplify their profits. However, it also magnifies the possibility of losses. The Liquidation Price is a core indicator that must be understood; otherwise, while waiting for the market to rebound, the position may have already been liquidated.

What is the liquidation price?

Simply put, when a trader’s contract position incurs a loss close to the user’s margin, the exchange, in order to control risk, forcibly sells the position at a price. Let’s take a simple example:

When a trader takes a long position on Bitcoin with 10x leverage at a starting price of $30,000, only one-tenth of the capital is required to open a 1 BTC position. If the BTC price falls close to $27,000, the trader’s loss will nearly equal the entire margin, and the system will automatically liquidate the position. At that point, not only will there be no profit, but the trader may be left with only a small residual value—or even face additional costs such as fees and liquidation charges. Therefore, the liquidation price serves as the ultimate stop-loss threshold for this leveraged tool; once it is triggered, there is no turning back.

The basic calculation logic of the settlement price

Each exchange has slightly different calculation methods, but the core logic is actually similar and related to the following factors:

• Leverage Ratio: The higher the leverage, the closer the liquidation price is to the opening price.
• Opening Price: The price at which you enter a position is the basic reference point.
• Position direction: Long positions will be liquidated due to falling prices, while short positions will be liquidated due to rising prices.
• Account Margin: Used to guarantee the principal amount of this position.
• Maintenance Margin Rate: When the position loss approaches this ratio, the system will liquidate.

The higher the leverage, the closer it is to the liquidation price, leaving less room for market fluctuations.

The actual settlement price may not be equal to the displayed settlement price

The liquidation price that users see on the trading interface is just a theoretical value, and will be influenced by the following factors during actual liquidation:

• Funding Rate: The longer the position is held, the cost may eat up the margin.
• Liquidation fee: Some exchanges may charge forced liquidation fees or insurance fund taxes
• Market Slippage: The market may experience significant volatility at the time of liquidation, resulting in a worse actual execution price.

Even if the theoretical liquidation price has not been reached, users’ positions may be liquidated in advance, which is called early liquidation, and is also the moment when novices are most scared.

How to avoid being liquidated?

1. Reduce leverage

This is the most fundamental strategy. Instead of expecting huge profits with 25 times leverage, it is better to control risks with 3-5 times leverage. Leverage is not necessarily a tool for getting rich, but a double-edged sword.

2. Set the stop-loss point

Never think that it will bounce back after another fall. Without stop-loss, you will never know where the bottom is. Instead of waiting for the exchange to force stop-loss, it’s better to decide your own exit position.

3. Use a staged position-increasing strategy

Splitting a position into multiple entries can effectively widen the range of liquidation prices and allow for more adjustment space.

4. Monitoring Funding Rate

When holding a position for a long time, pay attention to the funding rate. If you are long but the funding rate is negative, it means you will be continuously charged, which will also accelerate the risk of liquidation.

Risk models for Cross Margin and Isolated Margin

1. Cross Margin Mode

Traders share margin for all their assets. When one position is close to liquidation, it will consume assets of other coins to remedy, which can be flexible for professionals, but novices are prone to liquidation of one position and zeroing of the entire account.

2. Cross Margin Mode (Isolated Margin)

The risk of each position is independent, and only the margin of that position will be consumed during liquidation. The risk is relatively easier to control, and beginners can reduce risk to a certain extent by using isolated margin for leveraged trading.

Summary

Futures trading, characterized by high leverage, high volatility, and high risk, has attracted many speculators. The liquidation price is a critical indicator that every trader must understand, as it directly determines whether a position will be forcibly closed. The calculation of the liquidation price is closely tied to factors such as leverage, entry price, position direction, account margin, and the maintenance margin rate. Although high leverage can lead to substantial returns, it also brings the liquidation price closer to the entry point, increasing the risk of liquidation. Understanding the liquidation price and adopting appropriate strategies before trading is a fundamental skill that every crypto futures trader must develop in the pursuit of high returns. By managing risks effectively, traders can better navigate market volatility and avoid unnecessary losses.