How Is the Liquidation Price Calculated Using Leverage?
The liquidation price is determined by the point at which the trader's margin balance falls below the maintenance margin requirement. The higher the leverage, the closer the liquidation price is to the entry price, as a smaller price movement is needed to erode the small initial margin.
The calculation involves the entry price, leverage, position size, and maintenance margin rate.
Glossar
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.
Partial Liquidation
Trigger ⎊ Partial liquidation in cryptocurrency derivatives represents a margin call event where a portion of a leveraged position is forcibly closed to limit further losses, initiated when the account equity falls below a predetermined maintenance margin level.
Liquidation Price
Trigger ⎊ The Liquidation Price is the specific market price level at which a trader's margin equity falls to the maintenance margin threshold, causing the exchange or protocol to automatically close the leveraged position to prevent the account balance from falling into negative territory.
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.
Funding Rate
Cost ⎊ The Funding Rate is the periodic payment exchanged between long and short positions in perpetual futures contracts, designed to anchor the contract price to the underlying spot index price.
Liquidation
Trigger ⎊ Liquidation in cryptocurrency derivatives represents the forced closure of a trading position due to insufficient margin to cover accruing losses, a critical event impacting market stability.