How Does the Liquidation Process Work for a Leveraged Futures Position?
Liquidation occurs when a trader's margin balance falls below the maintenance margin requirement. The exchange or protocol automatically closes the leveraged position to prevent the account balance from dropping below zero.
The trader typically loses their entire margin, and a liquidation fee is often charged. This process is designed to protect the solvency of the exchange and the insurance fund.
Glossar
Leveraged Futures
Concept ⎊ Leveraged Futures are derivative contracts that permit a trader to control a large notional position in an underlying cryptocurrency asset with a relatively small amount of initial capital, known as margin.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.
Liquidation Fee
Mechanism ⎊ A liquidation fee, within cryptocurrency derivatives and options trading, represents a cost incurred when a leveraged position is forcibly closed by an exchange due to insufficient margin maintenance.
Leveraged Position
Position ⎊ A leveraged position, within cryptocurrency derivatives, options trading, and broader financial derivatives, represents an exposure exceeding the initial capital outlay, amplified through instruments like perpetual futures contracts, leveraged tokens, or options.
Margin Balance
Balance ⎊ The margin balance represents the net value of a trading account, reflecting the difference between the total collateral posted and the current realized and unrealized profit or loss on open positions.
The Liquidation Process
Process ⎊ The liquidation process is the automated, irreversible sequence of events triggered when a leveraged position's collateral value falls below the minimum maintenance margin required by a derivatives or lending protocol.