Comprehensive Guide to Liquidation Price and Risk Management

Foreword

In the cryptocurrency market, futures contract trading is favored by many speculators due to its high leverage and volatility. However, in such a high-risk environment, the “liquidation price” becomes a core indicator that every trader must understand. If one does not understand the liquidation price, their position may be forcibly liquidated while they are still waiting for a rebound. This article will take you into an in-depth understanding of the operational logic of the liquidation price, its influencing factors, and how to effectively manage risk.

What is the liquidation price?

The liquidation price refers to the price at which the exchange forcibly sells your position to control risk when your contract position’s losses approach the margin. For example, if you go long on Bitcoin with 10x leverage and the opening price is $30,000, when the price drops to about $27,000, the loss approaches your entire principal, and the system will automatically liquidate your position. The liquidation price is the stop-loss bottom line for leveraged trading; once reached, there is no turning back.

Calculation logic of the liquidation price

Different exchanges have slight variations in their calculation methods, but the core principles are generally the same and mainly relate to the following factors:

• Leverage multiple: The higher the leverage, the closer the liquidation price is to the opening price, and the greater the risk.
• Opening price: used as a reference point for calculations.
• Position direction: Long positions were liquidated due to price decline, while short positions were liquidated due to price increase.

• Account margin: the principal used to secure a position.

• Maintenance margin ratio: When the loss reaches this percentage, liquidation is triggered.

• High leverage means that the market has less room for fluctuations, and a slight misstep can lead to liquidation.

The difference between theoretical and actual settlement prices

The liquidation price displayed on the interface is only a theoretical value and will be affected by the following factors during actual liquidation:

• Funding Rate: The longer the position is held, the more additional costs may erode the margin.
• Liquidation Fee: Some platforms may charge a forced liquidation fee.
• Market Slippage: If the market is highly volatile during liquidation, the execution price may be worse.

Therefore, even if the theoretical liquidation price has not been reached, positions may be liquidated in advance, which is known as “early liquidation.”

How to avoid liquidation?

• Reduce leverage: It is recommended to use leverage of 3 to 5 times to lower risk.
• Set a stop-loss point: proactively set a stop-loss to avoid being passively forced to close a position.
• Batch positioning: Split the position into multiple entries to widen the liquidation price range and increase adjustment space.
• Pay attention to the funding rate: When holding a long position, closely monitor the funding rate to avoid being liquidated due to accelerated fees.

The risk differences between full margin and isolated margin

• Full Margin Mode: All assets share the margin, and a liquidation of one position may cause the entire account to go to zero, suitable for experienced traders to flexibly allocate funds.
• Isolated Margin Mode: Each position calculates risk independently, and liquidation only affects the principal of that position, making risk easier to manage, which is more suitable for beginners.

Summary

Although futures contract trading presents high profit opportunities, the settlement price is a key indicator that every trader must keep in mind. It is recommended to thoroughly understand the calculation of the settlement price before trading, reasonably control leverage and risk, set stop losses, and choose a risk management model that suits oneself in order to move forward steadily in the highly volatile crypto market.