Liquidation Explained: Why Leverage Kicks You Out Before Your Stop
Jan DreherJune 20268 min readEvery futures position is backed by margin, your stake. When the market runs against you, the unrealized loss eats up that margin. Before it is fully gone, the exchange force-closes your position: the liquidation. You lose the margin, no matter what the market does afterward.
The rule of thumb
Simplified, the liquidation sits roughly 100 divided by leverage percent away from the entry. At 10x that is about 10 percent, at 25x about 4 percent, at 50x about 2 percent, at 100x about 1 percent. In practice it sits even closer to the entry, because maintenance margin and fees factor in too.
- 10x leverage: liquidation at about minus 10 percent
- 25x leverage: liquidation at about minus 4 percent
- 50x leverage: liquidation at about minus 2 percent
- 100x leverage: liquidation at about minus 1 percent
The classic account killer
Bitcoin often moves 2 to 3 percent on a normal day. Trade with 50x and no stop, and you get liquidated by completely ordinary market noise. No crash needed, no manipulation, just a Tuesday. The trade can be thought out in the right direction and still end at zero, because the path there runs through the liquidation zone.
Mark price, not last price: which price liquidates
Exchanges liquidate off the mark price, not off the last traded price. The mark price is a smoothed reference price from multiple sources, meant to prevent a single outlier trade on one exchange from force-closing positions en masse. For you that means two things: a short wick in the chart does not necessarily trigger your liquidation, and conversely the mark price can reach your level without the exchange chart showing it exactly that way. That is why both prices always sit side by side in the terminal.
Isolated or cross margin: what is on the hook in a worst case
With isolated margin, only the margin you assigned to that one position is on the hook, the rest of the account stays untouched. With cross margin, your entire futures balance is on the hook, which lets the position hold out longer, but if it goes wrong, everything is gone. For getting started, isolated is the right setting: a mistake costs a defined amount, never the account. Cross is a tool for advanced traders who net multiple positions against each other.
If your liquidation sits closer to the entry than your stop-loss, you do not have a plan. You have a countdown.
The right way around
First the stop: where is your idea invalidated? Say 4 percent below the entry. Then the risk: 1 percent of the account. From that the position size follows. In the end the leverage only determines how much margin you post for that size, and it has to be chosen so the liquidation sits clearly beyond your stop. With a 4 percent stop that means: at most around 15x to 20x, with a buffer rather less.
In the simulator you can play this through safely: open a position with high leverage and watch how close the liquidation line clings to the entry. This one exercise with play money replaces a very expensive learning moment with real money.
Frequently asked questions
What happens to my money in a liquidation?
The margin of the position is gone, it covers the loss and the exchange's liquidation fee. With isolated margin that is the end of it, your remaining balance stays untouched. If anything is left over after the force-close, it usually goes to the exchange's insurance fund, not to you, one more reason never to let it get that far.
Can I still prevent a looming liquidation?
Yes, in three ways: close the position partially or fully, add more margin, or with cross margin keep balance free. But all three are emergency operations that only manage the original mistake. The clean solution happens before the trade: choose leverage so the liquidation sits far beyond the stop-loss, then the question never comes up.
Why was I liquidated even though the chart barely touched my level?
Because liquidation runs off the mark price, not off the last price in the chart. The mark price is a reference price from multiple exchanges and can deviate from what your candlestick chart shows, especially in fast moves. On top of that comes maintenance margin: the force-close begins before the margin is completely used up, so the level sits closer to the entry than the simple rule of thumb suggests.
Is isolated or cross margin better?
For beginners clearly isolated: the maximum damage per trade is the assigned margin, the account survives every single mistake. Cross margin lets positions hold out longer, but puts the entire futures balance on the line and rewards exactly the behavior that ruins beginners, namely letting losers run. Anyone using cross should know why, and have an account whose loss they can absorb.
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Start for freeJan Dreher is the founder of learn-daytrading.com and builds tools for crypto traders, including the simulator with real live prices from Binance and Bybit and the platform's position size calculator. Here he writes about the craft behind trading: risk, position size and the math most traders fail at. Every number in his articles is verifiable, every recommendation is justified.