Liquidation is a critical process in margin trading that occurs when a trader's position is automatically closed by the exchange due to insufficient margin. This mechanism protects both the trader and the platform from further losses. In a unified trading account, all assets are combined into a single portfolio, allowing for shared margin and more efficient capital utilization. However, this also means that the liquidation process considers the entire account's equity rather than individual positions.
This guide explains the liquidation workflow, key concepts like margin and leverage, and how to manage risk effectively. Whether you are new to trading or an experienced investor, understanding these rules is essential for safeguarding your investments.
How Liquidation Works in a Unified Account
In a unified margin system, your account balance, open positions, and available assets are all interconnected. The total equity value determines your margin level and risk of liquidation.
Here's a step-by-step overview of the process:
- Initial Margin and Maintenance Margin: When you open a leveraged position, you lock in an "initial margin." The "maintenance margin" is the minimum amount required to keep that position open.
- Margin Ratio Calculation: The system continuously monitors your account's Margin Ratio, which is the ratio of your equity to the maintenance margin required for all your open positions.
Margin Ratio = Equity / Maintenance Margin Requirement - Liquidation Trigger: If your account's equity falls to or below the maintenance margin requirement, your Margin Ratio hits 100%, and liquidation is triggered. This means your positions no longer have enough collateral to cover potential losses.
- Partial or Full Liquidation: The exchange's system will automatically begin closing your positions, starting with the most risky ones, until your Margin Ratio is restored to a safe level above 100%.
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Key Factors Influencing Liquidation
Several variables affect your proximity to liquidation. Being aware of them can help you make more informed trading decisions.
- Leverage: Higher leverage amplifies both potential profits and losses. A highly leveraged position will have a higher maintenance margin requirement and can be liquidated much faster with a small adverse price move.
- Market Volatility: Sudden and sharp price movements, common in cryptocurrencies, can rapidly decrease your equity, triggering liquidation before you can manually intervene.
- Portfolio Concentration: A unified account allows for cross-margin. However, holding one or two large, highly correlated positions increases risk. A price drop in that asset can significantly impact your entire account's equity.
- Funding Rates (for Perpetual Swaps: Holding positions through funding fee payments can slowly erode your equity if you are on the paying side, gradually bringing you closer to liquidation.
A List of Common Trading Pairs
The following is a non-exhaustive list of popular trading pairs across various markets. This illustrates the diversity of assets available but is not a recommendation.
Major Cryptocurrency Pairs:
- BTCUSDT, ETHUSDT, SOLUSDT
- XRPUSDT, ADAUSDT, BNBUSDT
- DOGEUSDT, MATICUSDT, AVAXUSDT
Perpetual Swap Contracts:
- BTCPERP, ETHPERP, SOLPERP
- GMTPERP, ADAPERP, AVAXPERP
USD-Margined Futures:
- BTCUSD, ETHUSD, XRPUSD
- SOLUSD, ADAUSD, LTCUSD
New trading pairs are frequently added to exchanges, expanding the available opportunities for traders. Always check the official specifications for each contract before trading.
How to Avoid Liquidation
Proactive risk management is the only way to prevent liquidation. Here are the most effective strategies:
- Use Lower Leverage: Opt for conservative leverage. It reduces your maintenance margin requirement and gives your positions more room to withstand market fluctuations.
- Monitor Margin Ratio: Keep a constant watch on your account's Margin Ratio, not just the PnL of individual positions. Set alerts to warn you if it approaches dangerous levels.
- Implement Stop-Loss Orders: A stop-loss order automatically closes your position at a predetermined price point, capping your loss and preventing liquidation.
- Maintain a Balanced Portfolio: Diversify your holdings across uncorrelated assets. In a unified account, profits from one position can help offset losses in another.
- Add Collateral: If your Margin Ratio is getting high, you can deposit more funds (e.g., USDT or BTC) into your account to increase your equity and lower the ratio.
👉 View real-time margin tools and calculators to help you monitor your account health accurately.
Frequently Asked Questions
What is the difference between isolated margin and cross-margin in a unified account?
A unified account typically operates on a cross-margin principle by default, where all equity is shared as collateral. Some platforms may offer an "isolated margin" mode for specific positions, where you assign a fixed amount of margin that can be lost entirely without affecting other holdings.
Can I get my money back after a liquidation?
No. Liquidation means your positions were closed because your equity could no longer cover the losses. Any remaining equity after all positions are closed and fees are paid is returned to your account, but the lost margin is not recoverable.
What is a liquidation fee?
Exchanges often charge a liquidation fee for automatically closing your positions. This fee compensates the platform for executing the order during the liquidation process and is deducted from your remaining equity.
How is the liquidation price calculated?
The liquidation price is dynamically calculated based on your current equity, maintenance margin requirement, and the details of all your open positions. It changes with market prices and your account balance, so it is not a fixed value.
What is an Auto-Deleveraging (ADL) system?
Some platforms use an ADL system as a last resort if a liquidated position cannot be closed on the open market. It automatically deleverages opposing positions of profitable traders in the system to neutralize the risk. This is a mechanism of last resort and is becoming less common.
Does trading on a spot-only basis trigger liquidation?
No. Liquidation is a feature of margin trading, futures, and other derivative products. If you only trade spot (buying and selling assets with your own full balance without borrowing), you cannot be liquidated, though the value of your assets can still decrease.