Marking price in crypto trading: how to protect yourself from liquidation

When trading derivative contracts, one of the biggest risks is unexpected forced liquidation. This can happen due to short-term price fluctuations, manipulation on a particular exchange, or simply an unsuccessful position. This is where the marking price comes into play — a mechanism that provides traders with a more accurate picture of the true value of the asset.

Why is the marking price important for you?

Often, the last transaction price on an exchange may not reflect the actual market value of the asset. Traders frequently use the marking price as a more reliable reference point when making decisions. This is especially critical during margin trading, where a small miscalculation can cost you your position.

The marking price is calculated based on the volume-weighted average of the spot prices of the asset across different exchanges, making it less susceptible to price manipulation on a single platform. An exponential moving average (EMA) of the basis — the difference between the spot and futures prices — is added to further smooth out abnormal fluctuations.

How does this work in practice?

The marking price formula looks like this: Marking Price = Spot Index Price + EMA (Basis)

Or an alternative: Marking Price = Spot Index Price + EMA [(Best Bid + Best Ask) / 2 - Spot Index Price]

The spot index price is the average price of the asset across several exchanges. EMA tracks price changes over a certain period, giving more weight to recent data. The basis indicates how the market expects the price to change in the future.

The best bid is the highest price someone is willing to buy the asset at right now, and the best ask is the lowest price someone is willing to sell it at. These indicators provide a more complete picture of supply and demand.

Marking price vs. last transaction price

The difference between these two indicators is significant for risk management. The last transaction price is simply the price of the most recent trade, which can be distorted by a large one-time order or manipulation. The marking price considers a broader view.

Imagine this scenario: the last transaction price suddenly drops due to a controlled trade, but the marking price remains stable. In this case, your position will not be liquidated, even though the last trade price approached your stop-loss. This demonstrates the value of using the marking price when setting liquidation levels.

How do trading platforms use this mechanism?

Leading exchanges apply the marking price to calculate users’ margin ratios during margin trading. Instead of relying on the last transaction price, they depend on the marking price to determine when liquidation will be triggered. This provides users with real protection against sudden fluctuations caused by manipulation or technical glitches.

When the marking price reaches the calculated forced liquidation level, full or partial liquidation of your position is triggered. This approach makes the system fairer and more predictable for all participants.

Practical application of the marking price

Accurate calculation of liquidation levels

Before opening a position, use the marking price to determine at what price liquidation will be triggered. This gives you a more realistic assessment of risk. If you find that the liquidation level is too close to the current marking price, add more margin to avoid risk.

Setting precise stop-loss orders

Many experienced traders set their stop-loss orders not at the last transaction price, but with a small buffer below the marking price of the liquidation level. For long positions, this means placing the stop slightly below, and for short positions, slightly above. This approach provides a buffer against sudden volatility and theoretically closes the position before liquidation occurs.

Maximizing trading opportunities

Use limit orders placed at the marking price level to automatically enter positions at optimal moments according to your technical analysis. This allows you to catch opportunities when the price is near the marking price without constantly monitoring charts.

What risks remain?

Although the marking price is significantly safer than the last transaction price, risks still exist. During extreme volatility, the marking price can change faster than you can close your position, and you may still be liquidated. Additionally, some traders overly rely on the marking price, ignoring other risk management tools.

Always adopt a comprehensive approach: combine the marking price with diversification of positions, sensible sizing, positioning, and regular review of your risk levels.

Common questions

What is the purpose of the marking price?
It protects traders from forced liquidation due to price manipulation and provides a more accurate indicator for margin ratio calculations. Traders use it to justify setting liquidation and stop-loss levels.

What is the difference between the marking price and the market price?
The marking price is a volume-weighted average of the asset across multiple exchanges plus the EMA of the basis. The market price is the current transaction price on a specific exchange. The marking price is more stable and resistant to manipulation.

Can I be liquidated if I use the marking price?
Yes. During extreme volatility, the marking price can change rapidly. If it reaches your liquidation level before you manage to close your position, you can still be liquidated. Always set a sufficient margin buffer.