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:

𝐿𝑖𝑞𝑢𝑖𝑑𝑎𝑡𝑖𝑜𝑛𝑃𝑟𝑖𝑐𝑒=𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑃𝑟𝑖𝑐𝑒+(𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑃𝑟𝑖𝑐𝑒×𝑀𝑎𝑟𝑔𝑖𝑛𝑅𝑎𝑡𝑖𝑜𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒−1)LiquidationPrice=CurrentPrice+(Leverage−1CurrentPrice×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 × 0.01) / (10 - 1)

Liquidation Price = $50,000 + $500 / 9 ≈ $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:

𝑀𝑎𝑟𝑔𝑖𝑛𝑅𝑎𝑑𝑖𝑜=(𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑆𝑖𝑧𝑒×𝐼𝑛𝑖𝑡𝑖𝑎𝑙𝑀𝑎𝑟𝑔𝑖𝑛𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑃𝑟𝑖𝑐𝑒×𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒)MarginRadio=(CurrentPrice×LeverageContractSize×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 × 2,000) / (50,000 × 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.