Forced liquidation (or “liquidation”) occurs when a trader’s margin balance falls below the required maintenance margin level, triggering an automatic closure of their position by the exchange. This happens when the mark price reaches the liquidation price, resulting in the loss of the entire maintenance margin.
Key Concepts About Liquidation
1. Mark Price vs. Liquidation Price
To prevent unfair liquidations due to low liquidity or market manipulation, exchanges like XT use the mark price (a fair value estimate) instead of the last traded price to determine liquidation triggers.
2. Tiered Margin Requirements
Larger positions require higher margin levels to mitigate systemic risks. XT’s liquidation engine uses tiered margins to:
– Reduce market impact during large-scale liquidations.
– Partially close positions (instead of full liquidation) to protect traders.
3. Cross-Margin Mode Implications
In cross-margin mode, all available balance is used as position margin. However:
– Losses in one position won’t affect other cross-margin positions.
– Liquidations still apply if the total margin is insufficient.
Liquidation Price Formulas
| Position Type | Formula | Rounding Rule |
|---|---|---|
| Long (UP) | (Avg. Entry Price × Size × Face Value + Maintenance Margin − Position Margin) ÷ (Size × Face Value) |
Round up |
| Short (DOWN) | (Avg. Entry Price × Size × Face Value − Maintenance Margin + Position Margin) ÷ (Size × Face Value) |
Round down |
What Happens After Liquidation?
- Loss > Margin Balance: Entire margin is lost; position is closed.
- Loss < Margin Balance: Remaining margin is returned to the trader.
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Risks and Proactive Measures
- Irreversibility: Liquidations are automatic—traders can’t control timing or execution price.
- Volatility Impact: Sudden price swings may worsen losses.
How to Mitigate Risks:
– Monitor margin levels closely.
– Use stop-loss orders to limit downside.
– Maintain a buffer above maintenance margin.
FAQs
1. Can I cancel a liquidation once triggered?
No. Liquidations are irreversible and executed automatically by the exchange.
2. Does cross-margin mode prevent liquidations?
No—it pools your balance but won’t stop liquidations if the total margin is inadequate.
3. How is mark price calculated?
It’s derived from aggregated data across major exchanges to reflect fair market value.
4. Why does partial liquidation occur?
To minimize trader losses by closing only enough positions to restore margin requirements.
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Final Tips
- Avoid over-leveraging: Higher leverage = higher liquidation risk.
- Stay informed: Track market conditions and adjust positions accordingly.
By understanding liquidation mechanics and adopting disciplined risk management, traders can safeguard their portfolios in volatile markets.