Liquidation
The forced closing of a leveraged position when margin falls below the required minimum.
When the margin runs out
With leverage, the exchange or broker lends the difference between the position and the margin posted. If the unrealised loss brings the margin close to the required minimum, the position is closed by force: that is liquidation. The liquidation price is known from the start; the higher the leverage, the closer it is.
Long : P_liq ≈ entrée × (1 - 1/levier + mm)
- mm
- maintenance margin, as a share of the position.
Worked example
Three leverages, three distances
- x2: liquidation after a fall of about 49.5%.
- x10: after a fall of 9.5%.
- x50: after a fall of 1.5%.
With a 0.5% maintenance margin, x50 tolerates only a 1.5% move.
Common mistakes
- Opening with cross margin without understanding that the whole account balance can be absorbed.
Questions and answers
What is a margin call?
At a broker, the warning asking you to top up margin before liquidation. On crypto exchanges, liquidation is often automatic, with no call.
Notitia newsroom · education, not investment advice.