Foundations · Lesson 8 · Beginner
Liquidation: the kill mechanic
You understand when liquidation happens and why high leverage pushes the liquidation close to the entry.
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When liquidation happens
Liquidation happens when your loss eats up your margin. The exchange closes the position by force so that your loss does not grow larger than your stake.
The rule of thumb
The percentage distance to liquidation is roughly 1 divided by leverage. 10x is roughly 10 percent, 25x roughly 4 percent, 50x roughly 2 percent. Maintenance margin pushes the point even closer.
Push leverage and maintenance up and watch the liq line slide toward the entry.
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Test yourself
Where must your stop never sit?
- at the liquidation price
- behind a support on a long
- outside the market noise
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The key points at a glance
- Liquidation happens when your loss eats up your margin.
- The distance to liquidation is roughly 1 divided by leverage.
Deep dive
How the exchange calculates your liquidation price
For a long in isolated mode, the liquidation price sits roughly at entry times (1 minus 1 divided by leverage plus the maintenance margin rate). The maintenance margin is the minimum equity the position must hold to stay open.
- Long at 100, 10x leverage, MMR 0.5 percent gives liquidation at 90.5
- A move of only 9.5 percent against you wipes out your stake
- At higher leverage the MMR steps up and moves closer
- At 50x the real distance is almost always tighter than 2 percent
Isolated or cross margin
With isolated margin only the margin of one position is at stake, the rest stays untouched. With cross margin your entire equity acts as a shared buffer, which delays individual liquidations but risks the whole account on a strong move.
Perps liquidate against the mark price, not against the last price on one exchange. A brief wick on an illiquid exchange is still sometimes enough. Low leverage gives you the buffer that normal market noise requires.
What a liquidation cascade is
A force-closed long creates forced selling, pushes the price down and liquidates the next long. Taleb calls this negative gamma: the market falls harder, but less often, than it rises.
- Never meet a margin call: close instead of adding more
- Averaging down turns a limited loss into an unlimited one
- Never place the stop at the liquidation price, always behind a chart level
- At tops many longs sit crowded together with a tight liquidation distance
Sources: Elder, Goodman, Taleb
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