How to correctly calculate the liquidation price in futures and protect your position

What is liquidation and when does it occur

Liquidation is the forced closing of a trading position, which happens at a critical moment when your margin balance falls below the required maintenance margin level. At this point, the entire futures position is automatically closed by the system, and the maintenance margin is deducted from the account. This mechanism protects both the trader and the platform from excessive losses.

Key features of the liquidation mechanism

Fair price as the safety basis

When closing positions, a fair market price is used, eliminating the risk of manipulation or short-term price spikes. This approach prevents unnecessary liquidations caused by technical illiquidity in the market.

Differentiated margin requirements

Large positions require proportionally higher maintenance margin levels. When opening large volumes, the platform applies additional margin coefficients, reducing the likelihood of full position closure. The system often uses partial liquidation instead of complete closure to minimize negative effects.

Automatic system operation

When the liquidation process is triggered, the system first cancels all active orders for the current futures contract to free up some margin. Orders for other instruments remain unchanged. This sequence helps reduce losses during critical moments.

Formulas for calculating the liquidation price

General liquidation condition

A position is subject to liquidation when the following condition is met:

Margin of the position + unrealized P&L < Maintenance margin

Calculation for long positions

Liquidation price = (Maintenance margin — Margin of the position + Average opening price × Contract size) / Contract size

Calculation for short positions

Liquidation price = (Average opening price × Contract size — Maintenance margin + Margin of the position) / Contract size

Practical example of calculating the liquidation price

Let’s consider a specific scenario: a trader opens a long position of 0.1 BTC on the BTCUSDT contract at the current price of 50,000 USDT with 25x leverage.

Calculating maintenance margin: 50,000 × 0.1 × 0.4% = 20 USDT

Calculating initial margin: 50,000 × 0.1 / 25 = 200 USDT

Liquidation price for the long position: (200 — 20 + 50,000 × 0.1) / 0.1 = 51,800 USDT

This means if the price drops to 51,800 USDT or below, the position will be automatically closed.

Impact of margin type on liquidation calculations

Working with isolated margin

With isolated margin, each position has its own separate margin balance. The liquidation price is calculated solely based on this amount. The main advantage is that you control the risk of each position individually and can manually add margin to any position to delay liquidation.

Features of cross margin

In cross margin mode, the entire available account balance serves as margin for all open positions simultaneously. However, it’s important to remember that the wallet balance cannot be used to cover losses. When manually adding margin in this mode, the safety cushion between the current price and the liquidation price increases.

Risk limit system and its practical significance

Platforms typically set risk limits for each account to prevent mass liquidations of large positions:

• Increasing the position size automatically raises requirements for initial and maintenance margin
• The system dynamically adjusts margin coefficients based on the set risk limit
• Each trader can independently modify the risk limit in account settings to adapt to their strategy

Liquidation risk management strategies

Active monitoring of critical levels

Always know the price at which your position will be liquidated. Most platforms display this information in real-time when opening a position.

Margin replenishment as a protective measure

If the price moves against you, timely margin addition significantly delays liquidation and gives your position more time to recover.

Choosing the optimal margin mode

Isolated margin is suitable for conservative traders who want to control risk precisely. Cross margin is more suitable for experienced traders managing multiple positions simultaneously.

Respect risk limits

Set risk limits in accordance with your trading strategy and loss tolerance. This will prevent unexpected large position liquidations.

Summary

Understanding the liquidation mechanism and being able to calculate the liquidation price are fundamental skills for any futures trader. Regularly monitoring margin, timely replenishing your balance, and choosing the right margin mode will help you minimize losses and manage risks effectively. Remember, knowing how to calculate the liquidation price allows you to trade consciously and avoid costly mistakes.