Guide to Liquidation

Understanding Liquidation in Crypto Trading: Types, Calculation, and Risk Management

Liquidation is a critical concept in crypto trading, especially when using leverage. It refers to the forced or voluntary closing of a trading position when the value of a trader's margin falls below the required threshold. This article explores the types of liquidation, how to calculate your liquidation price, and actionable ways to manage liquidation risk effectively—particularly when trading perpetual contracts (perps).

Types of Liquidation

1. Forced Liquidation

This occurs automatically when your margin balance drops below the maintenance margin—the minimum amount needed to keep a position open. It’s triggered by unfavorable price movements, especially in high-leverage trades.

2. Voluntary Liquidation

Traders may also manually close their positions before reaching the liquidation threshold. This may be done to secure profits, minimize losses, or rebalance a portfolio. Tools like trigger orders (e.g., stop-loss or take-profit orders) allow traders to automate this process.

How to Calculate Your Liquidation Price

The liquidation price is the point at which your position is forcibly closed due to insufficient margin. It depends on several factors:

• Leverage used

• Initial margin

• Maintenance margin

• Trading pair volatility

• Exchange-specific formulas

Maintenance Margin Explained

Maintenance margin is the absolute minimum capital required to keep a position open. If your account balance falls below this margin, liquidation occurs—even if the price hasn’t reached your expected liquidation price.

Example: If you're long on a BTCUSDT.PERP position with 100x leverage and the maintenance margin is 0.5%, your liquidation price is closer than expected. Even a 0.5% drop could trigger liquidation—not the full 1% drop some traders might assume.

Mid Price vs. Mark Price: Why It Matters

When assessing liquidation risk, it’s essential to understand the difference between Mid Price and Mark Price:

• Mid Price: The average of the current bid and ask price. It's what you typically see on charts and is used for order triggers like stop-loss and take-profit.

• Mark Price: The fair price used by the exchange to calculate liquidation. It reflects the underlying asset’s value based on index price and funding basis.

Mark price calculation on Flipster:

Mark Price = Index Price + MA(5M, Basis), where Basis = (Best Bid + Best Ask) / 2 - Index Price

Liquidation is based on the Mark Price, not the Mid Price. As a result:

• Liquidation can happen before your stop-loss: If the Mark Price drops to your liquidation price while the Mid Price is higher, your position will be liquidated even if your stop-loss hasn't been triggered yet.

• The candlestick chart might not accurately reflect the liquidation price: By default, the candlestick chart on Flipster displays the Mid Price. Traders can change the chart settings to display the Mark Price to better gauge when liquidation will occur. 

Learn how liquidation, mid price and mark price works in more detail on our FAQ: Liquidation of Position.

Liquidation Alerts: Stay Ahead of Margin Calls

While forced liquidation is an automated process, some exchanges provide warning signals to help you avoid it. Before your position is liquidated, you'll receive warning emails when your margin balance falls to a critical level (e.g., 75% of your initial margin), giving you a chance to take action and potentially save your position.

How to Manage Liquidation Risk in Crypto Trading

1. Use Stop-Loss Orders

Stop-losses act as a safety net, automatically closing positions before significant losses accumulate. For example, if you’re long on ETH, placing a stop-loss 5% below your entry price can cap losses in case of sudden volatility.

2. Monitor Market News and Events

Major announcements like CPI data, interest rate decisions, or government crypto sales (e.g., Germany’s 2023 Bitcoin selloff) can trigger violent price swings. Stay informed to pre-empt and adjust positions accordingly.

3. Position Sizing and Leverage Management

Avoid overleveraging, especially in volatile markets. Smaller position sizes help reduce risk. Start with lower leverage and increase only as your experience and confidence grow.

How to Trade Cryptocurrencies on Flipster

Flipster provides tools and features designed to help traders manage liquidation risk, including stop-loss orders to execute your risk management strategies effectively.

1. Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).

2. Click the [Trade] tab.

3. Search for your preferred cryptocurrency and click on it.

4. Select the leverage (up to 100x).

5. Select either a Trigger Order or Market Order.

6. Enter the amount of coin you want to trade or choose a percentage of your available funds.

7. Once you have confirmed the details, click the [Long] or [Short] button to open a position.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with a significant risk of loss due to its high price volatility, and is not suitable for all investors. Please refer to our Terms.