Liquidation

Liquidation Price

In perpetual trading, calculating the liquidation point plays a crucial role in risk management and safeguarding the trader's capital.

Below is a fundamental formula for determining the liquidation point:

πΏπ‘–π‘žπ‘’π‘–π‘‘π‘Žπ‘‘π‘–π‘œπ‘›π‘ƒπ‘Ÿπ‘–π‘π‘’=πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘π‘ƒπ‘Ÿπ‘–π‘π‘’+(πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘π‘ƒπ‘Ÿπ‘–π‘π‘’Γ—π‘€π‘Žπ‘Ÿπ‘”π‘–π‘›π‘…π‘Žπ‘‘π‘–π‘œπΏπ‘’π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’βˆ’1)LiquidationPrice=CurrentPrice+(Leverageβˆ’1CurrentPriceΓ—MarginRatio​)

  • Current Price: The current market price of the underlying asset.

  • Margin Ratio: The ratio of profit or loss at which a position is liquidated during price fluctuations.

  • Leverage: The applied leverage in the trading position.

Example:

Let's say you buy a futures contract with a leverage of 10x, and the current price of the asset is $50,000. If the margin ratio is 0.01, then:

Liquidation Price = $50,000 + ($50,000 Γ— 0.01) / (10 - 1)

Liquidation Price = $50,000 + $500 / 9 β‰ˆ $55,555.56

If the asset's price falls below approximately $55,555.56, you may face a liquidation scenario to avoid further losses.

Margin Radio

Margin Radio is a crucial metric in perpetual trading, serving to determine the level of leverage and risk associated with a position.

Below is the fundamental formula for calculating the Margin Ratio:

π‘€π‘Žπ‘Ÿπ‘”π‘–π‘›π‘…π‘Žπ‘‘π‘–π‘œ=(πΆπ‘œπ‘›π‘‘π‘Ÿπ‘Žπ‘π‘‘π‘†π‘–π‘§π‘’Γ—πΌπ‘›π‘–π‘‘π‘–π‘Žπ‘™π‘€π‘Žπ‘Ÿπ‘”π‘–π‘›πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘π‘ƒπ‘Ÿπ‘–π‘π‘’Γ—πΏπ‘’π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’)MarginRadio=(CurrentPriceΓ—LeverageContractSizeΓ—InitialMargin​)

  • Contract Size: The size of the futures contract, typically defined by the exchange.

  • Initial Margin: The total amount required as an initial deposit to open a perpetual contract.

  • Current Price: The present market price of the underlying asset.

  • Leverage: The applied level of leverage in the trading position.

Example:

When you intend to open a futures position with a contract size of $5,000, an initial margin of $2,000, a current asset price of $50,000, and leverage set at 10x. Then:

Margin Ratio = (5,000 Γ— 2,000) / (50,000 Γ— 10)

Margin Ratio = 0.2 or 20%

In this example, the Margin Ratio is 20%, indicating that you have deposited 20% of the contract value to open a position with 10x leverage.

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