What is Liquidation?
The forced closure of a leveraged position when losses consume the margin backing it.
Liquidation: The forced closure of a leveraged position when losses consume the margin backing it.
What happens
When you open a leveraged position you post margin as collateral. As the price moves against you, that margin absorbs the loss. When it falls below the maintenance requirement, the platform closes the position automatically — you do not get a choice, and the margin is gone.
How close is close
| Leverage | Adverse move that liquidates |
|---|---|
| 2x | ~50% |
| 5x | ~20% |
| 10x | ~10% |
| 20x | ~5% |
| 50x | ~2% |
| 100x | ~1% |
These are approximate and liquidation triggers before the margin is fully consumed. Crypto routinely moves several percent in hours, which means high leverage positions are liquidated by ordinary volatility rather than by being wrong about direction.
Liquidation cascades
Liquidations are forced market sells. When many positions liquidate at similar levels, the resulting selling pushes price further, triggering more liquidations. That feedback loop is why crypto produces sudden moves far larger than any news would justify.
It also means liquidation clusters are visible and, to some participants, worth targeting. Price moving precisely to a level dense with stops and then reversing is a recognised pattern, not a coincidence.
Auto-deleveraging
If a liquidation cannot be closed at a price covering the loss, the shortfall goes to the platform's insurance fund. If that is exhausted, many platforms force-close profitable positions on the opposite side — auto-deleveraging.
The consequence is that in extreme conditions a correct, profitable position can be closed against your will, precisely when it is most valuable.
Avoiding it
- Use leverage low enough that normal daily volatility cannot reach your liquidation price.
- Prefer isolated margin, so one position cannot take the account.
- Set a stop well before the liquidation price, so you exit on your terms.
- Never add margin to a losing position to push liquidation further away.
The last point is the one that turns a manageable loss into a serious one. Adding margin to avoid liquidation increases the position's total exposure at exactly the moment the thesis is being contradicted.
Partial liquidation
Some platforms reduce a position in stages rather than closing it entirely, liquidating enough to restore the margin ratio. This can preserve part of the position, but it also means a series of adverse moves produces a series of forced sales, each at a worse price.
Whether a platform partially or fully liquidates, and at what thresholds, is in its documentation and is worth reading before trading rather than discovering during a move.
Where the liquidation price actually sits
The liquidation price depends on entry, leverage and the maintenance margin requirement — and that requirement commonly rises with position size. Scaling a position up therefore moves liquidation closer than the leverage figure alone implies.
The reliable approach is to read the liquidation price the platform displays after opening the position, rather than calculating from leverage. If it sits inside the asset's normal daily range, the position is too large for the account regardless of how good the idea is.
Related terms
Educational content, not financial or tax advice. Indian tax rules change — confirm your position with a qualified chartered accountant.
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