Understanding Liquidation: How to Avoid Getting Rekt
Liquidation is every leveraged trader's nightmare. Understanding how it works is essential for survival in the crypto futures market.
What is Liquidation?
Liquidation occurs when your margin balance falls below the maintenance margin requirement. The exchange forcibly closes your position to prevent further losses.
When you get liquidated:
- Your position is automatically closed
- You lose the entire margin for that position
- A liquidation fee is charged (typically 0.5-1%)
- In cross margin, other positions may be affected
Liquidation Price Formula
For Long positions (Isolated Margin):
Liq Price = Entry * (1 - 1/Leverage + MMR)
For Short positions (Isolated Margin):
Liq Price = Entry * (1 + 1/Leverage - MMR)
MMR = Maintenance Margin Rate (typically 0.5%)
Leverage vs Liquidation Distance
| Leverage | Distance to Liquidation |
|---|---|
| 5x | ~20% |
| 10x | ~10% |
| 25x | ~4% |
| 50x | ~2% |
| 100x | ~1% |
5 Ways to Avoid Liquidation
1. Use lower leverage
5-10x gives breathing room for volatility.
2. Always set Stop Loss
Exit before liquidation, not after.
3. Use Isolated Margin
Limit losses to a single position.
4. Size positions properly
Risk 1-2% per trade maximum.
5. Monitor funding rates
High funding can eat into margin.