Liquidation Price
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Key Takeaway
The mark price at which a leveraged position is automatically closed by the exchange to recover borrowed capital; for longs, Entry Price × (1 − 1/Leverage + Maintenance Margin Rate); for shorts, Entry Price × (1 + 1/Leverage − Maintenance Margin Rate).
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What Is Liquidation Price?
The mark price at which a leveraged position is automatically closed by the exchange to recover borrowed capital; for longs, Entry Price × (1 − 1/Leverage + Maintenance Margin Rate); for shorts, Entry Price × (1 + 1/Leverage − Maintenance Margin Rate).
How Liquidation Price Works
Frequently Asked Questions
What is liquidation price in simple terms?
Liquidation price is the exact price level at which the exchange will automatically close your leveraged position if price reaches it. For a long position at 10x leverage, it is roughly 9.5% below your entry price. For a short at 10x, it is roughly 9.5% above. When the market's mark price hits your liquidation price, the exchange closes your position without your input and uses the proceeds to recover the capital it effectively lent you. Calculating this level before you open a trade — and placing your stop well above it — is fundamental to leveraged trading discipline.
How does liquidation price work in crypto derivatives?
Liquidation price is determined by three inputs: entry price, leverage, and the maintenance margin rate. For a long: Entry × (1 − 1/Leverage + Maintenance Margin Rate). For a short: Entry × (1 + 1/Leverage − Maintenance Margin Rate). Liquidation is triggered when the mark price — a composite index price from multiple spot exchanges — reaches this level. Mark price, not last-traded price, is used to prevent manipulation via brief wicks. Once mark price touches the liquidation threshold, the exchange's engine closes the position at the best available market price.
How do traders use liquidation price to manage risk?
Traders use liquidation price as a reference point for three risk management steps: (1) Calculate the liquidation price before opening the trade using the formula, then confirm the stop-loss placement is between entry and liquidation — at the thesis invalidation level, not at the liquidation boundary. (2) If the planned stop-loss and the liquidation price are the same or very close, the leverage is too high for that trade — reduce leverage until a meaningful gap exists. (3) Use liquidation skew data from the Derivatives Positioning Framework to avoid entering long positions directly above large liquidation clusters, or short positions directly below them.
Common Misconceptions About Liquidation Price
Liquidation price is triggered by the last-traded price on the exchange
Liquidation is triggered by mark price, not last-traded price. Mark price is calculated from a composite index of spot prices across multiple major exchanges. This design specifically prevents liquidation from being triggered by a brief wick or thin-order-book manipulation on a single venue. If the exchange's own last price briefly spikes below your liquidation price but the mark price does not follow, your position is not liquidated. However, if the broader market genuinely moves to your liquidation level, the mark price will confirm it and liquidation will execute.
Placing a stop-loss at the liquidation price is sufficient risk management
A stop-loss placed at or near the liquidation price is not a risk management tool — it is a last resort that the exchange's liquidation engine will reach first. Stop-losses should be placed at the point where the trade thesis is technically invalidated — typically well above the liquidation price for a long. The gap between the thesis-invalidation stop and the liquidation price should be meaningful: if there is no gap, the leverage is too high for the trade. The stop-loss defines the trader's exit; the liquidation price is what happens if the stop fails or is not placed.
Once a position is open, the liquidation price is fixed and cannot change
Liquidation price is dynamic in several ways. Adding margin to an isolated margin position raises the liquidation price (moves it further from entry). Withdrawing excess margin lowers it (moves it closer). In cross margin mode, changes in account balance from other positions affect the aggregate liquidation threshold. Additionally, for tiered maintenance margin structures, a position that grows in notional value as the asset price rises may cross into a higher maintenance margin tier — which raises the maintenance margin rate and therefore raises the liquidation price, bringing it closer to current price.