What is Liquidation?
Leveraged positions are prone to volatile price swings, which may cause a trader’s equity to plunge into negative balance instantaneously. In such cases, losses can be more significant than the maintenance margin, leading to liquidation. This process is involuntary and automatic if a trade has come to meet specific price criteria. Liquidation can happen either slowly or quickly, depending on the amount of leverage used in a trade. For example, with lower amounts of leverage, liquidation won’t happen as soon as a minor correction occurs in the market. Nonetheless, higher amounts of leverage can deplete traders’ initial investment with little to no effort.
When Would Liquidation Occur?
A forced liquidation process happens when a trader can no longer meet the margin requirements of their leveraged position. For instance, a trader opens a long or short leveraged position. The market moves against the opened position, if the losses reach a certain value, a margin call is triggered. If the trader doesn’t add funds to the account time, the position is liquidated.
Quick Tips to Prevent Liquidation
There are multiple strategies that can be implemented to avoid risks, but you should consider the following to avoid liquidation.
- Use Stop-Loss Orders to Limit and Control Possible Losses: A stop loss is a trading tool Coinlocally Futures offers, which allows traders to set a price to automatically exit a trade should the price of an asset hit this predetermined level.
- Decrease the Amount of Leverage: The high amount of leverage can hurt a trader even when a small price change occurs. Thus, using lower leverage will help you navigate a volatile crypto market smoothly and safely.
- Avoid Accumulating More Contracts in a Losing Position: Adding more contracts to a losing position will increase your liquidation price of the entire position.
- Monitor and Consider the Margin Ratio: When your margin ratio reaches 100%, some, if not all, of your positions will be liquidated. The margin ratio is calculated as maintenance margin divided by margin balance. Therefore, if your margin balance drops below the maintenance margin rate - the exchange will liquidate your positions. You can use the Coinlocally Futures Liquidation price calculator to calculate how increasing your wallet balance will lower the liquidation price.
Note:
- The liquidation price displayed on the order page is for reference only. The actual liquidation price will be affected by market fluctuations and other factors. The final liquidation price is subject to the actual price the platform charges. Please note that price differences may lead to asset losses when liquidation happens. Therefore, please keep track of the LTV ratio to avoid being liquidated.
- When your position is liquidated, a certain percentage of the Insurance Clearance fee will be collected and contributed to the Insurance Fund reserves, marked as ''Insurance Clearance'' in the Transaction History.
- Coinlocally is not responsible for the message delivery failure caused by external factors, such as but not limited to local restrictions, service provider policies, and device issues.
- Coinlocally uses mark price to avoid liquidation caused by low liquidity or market manipulation.
- Under Isolated Margin, when position margin decreases to the maintenance margin level, the position is liquidated.
- Under Cross Margin mode, when available balance decreases to 0 and position margin decreases to maintenance margin level, the position is liquidated.