What is Liquidation?
Liquidation occurs when a trader's leveraged position is forcibly closed by the exchange because the position has lost too much value and no longer has sufficient margin to remain open.
Leveraged trading can result in total loss of your position. Never trade with money you cannot afford to lose.
Key Terms
Leverage
Borrowed funds to increase position size. 10x leverage means you control $10,000 with $1,000.
Margin
Collateral deposited to open and maintain a leveraged position.
Maintenance Margin
Minimum margin required to keep position open. Falls below = liquidation.
Liquidation Price
The price at which your position will be forcibly closed.
How Liquidation Works
Example: Long Position Liquidation
+4% price move = +$400 profit (40% ROI)
Entry price - Position opened
-5% price move = Margin call warning
-10% price move = LIQUIDATION ($1,000 lost)
Liquidation Price Formula
Liquidation Price = Entry Price × (1 - 1/Leverage)For long positions. For shorts, use (1 + 1/Leverage)
| Leverage | Move to Liquidation | Liquidation Price (Long) |
|---|---|---|
| 2x | -50% | $25,000 |
| 5x | -20% | $40,000 |
| 10x | -10% | $45,000 |
| 20x | -5% | $47,500 |
| 50x | -2% | $49,000 |
| 100x | -1% | $49,500 |
Types of Liquidation
Partial Liquidation
Only a portion of your position is closed to reduce risk and restore margin levels.
- Reduces position size by 25-75%
- Allows remaining position to survive
- Available on some exchanges
Full Liquidation
Entire position is closed. All margin used for that position is lost.
- 100% of position closed
- Total loss of margin
- Most common type
ADL (Auto-Deleveraging)
When insurance fund is depleted, profitable traders' positions are used to close losing positions.
- Affects profitable traders
- Based on profit + leverage ranking
- Rare but possible in extreme volatility
How to Prevent Liquidation
Use Lower Leverage
Lower leverage = more room for price movement before liquidation.
Set Stop Losses
Automatically close position before reaching liquidation price.
Smaller Position Sizes
Don't risk too much of your capital on a single trade.
Add Margin (If Available)
Deposit additional funds to reduce liquidation risk.
Monitor Margin Ratio
Keep track of your margin ratio and act before it's too late.
Avoid High Volatility Events
Reduce or close positions before major news, FOMC, etc.
Liquidation Cascades
Liquidation cascades occur when a large number of positions are liquidated in a short period, causing a chain reaction of further liquidations.
Initial Price Drop
Price falls due to selling pressure or news
Liquidations Trigger
Over-leveraged longs get liquidated
More Selling
Liquidations add selling pressure
Cascade Effect
Price drops further, more liquidations
Notable Liquidation Events
💡 How to Profit from Liquidations
- Monitor liquidation data: Large liquidation clusters can indicate local bottoms/tops
- Watch funding rates: Extreme funding often precedes liquidation events
- Identify liquidation levels: Price often bounces after hitting major liquidation zones
Trade Smarter, Not Harder
Use our RSI Heatmap to find better entry points and avoid chasing pumps that lead to liquidation.
Frequently Asked Questions
What happens when you get liquidated in crypto?
When liquidated, the exchange forcefully closes your leveraged position to prevent further losses. You lose your margin (collateral) for that position. With isolated margin, only that position's margin is lost. With cross margin, your entire account balance can be used and lost.
Can you owe money after a crypto liquidation?
On most major exchanges with insurance funds (like Binance, Bybit), you cannot go negative. The exchange absorbs the loss beyond your margin. However, on some protocols or during extreme volatility, negative balance is possible. Always use isolated margin to limit risk.
What leverage is safe for crypto trading?
For beginners, 2-3x leverage is recommended. Even experienced traders rarely use more than 10x. Higher leverage dramatically increases liquidation risk — at 100x leverage, a 1% move against you wipes out your position. The key is position sizing, not leverage level.
How do I avoid getting liquidated?
Use lower leverage (2-5x), always set stop losses, use isolated margin mode, don't risk more than 1-2% of your account per trade, and avoid trading during high-volatility events like CPI releases or FOMC meetings. Monitor your liquidation price and keep it far from current price.
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