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Liquidation is the forced closure of a leveraged position when your account equity drops below the maintenance margin threshold. At 1:10 leverage, a 10% price move against you triggers it. At 1:25, just 4%. These are not warnings. They are hard boundaries where the exchange closes your position and takes the remaining margin.
This happens across crypto perpetuals, forex, and equity CFDs. The mechanics differ slightly between platforms, but the principle is identical: when unrealized losses approach the margin backing the position, the platform intervenes automatically.
The same patterns appear repeatedly in liquidation events: oversized positions, unclear margin allocation, and no defined exit rules. Understanding where your liquidation price sits relative to your entry is the difference between controlled risk and losing the entire margin in a single move. This guide covers the exact math, worked examples, and practical steps to keep positions away from forced closure.
Before entering any leveraged position, know your liquidation threshold. At 1:10 leverage, a 10% adverse move liquidates you. At 1:25, it is 4%. At 1:50, just 2%. Use the liquidation price calculator to find your exact threshold before every trade. This number is not a safety net. It is the point where 100% of your margin disappears.
In this guide
Liquidation is the forced closure of a leveraged position by the exchange or broker when unrealized losses approach the margin backing the trade. The platform closes the position automatically to prevent the loss from exceeding deposited collateral.
This is not the same as a stop-loss. A stop-loss is voluntary. Liquidation is not. The exchange acts to protect itself from the trader owing more than the account contains.
The sequence works like this: first, a margin call appears when equity drops close to the maintenance margin threshold. This is the warning. If the trader does not add funds or reduce the position, and price keeps moving against them, liquidation follows. That is the last moment of control. After liquidation, the margin allocated to that position is gone.
Most retail platforms include negative balance protection, meaning losses are capped at deposited funds. This varies by broker and jurisdiction. Check the broker’s terms or risk disclosure for confirmation.
The key concept is maintenance margin. This is the minimum equity percentage required to keep a position open. When account equity drops to this level, the liquidation engine activates.
The same principle applies in stock margin accounts. When equity falls below the broker’s maintenance margin requirement, the broker automatically sells holdings to cover the shortfall. Thresholds and procedures vary by broker and jurisdiction.
With isolated margin, liquidation affects only the specific position. With cross margin, one losing position can drain margin from the entire account. The difference between cross margin and isolated margin determines whether liquidation is contained or account-wide.
Liquidation happens when unrealized losses consume the margin backing a position. The math is straightforward once you see it with real numbers.
A trader deposits $1,340 and opens a position using 1:5 leverage. This means they control $6,700 worth of exposure. The margin requirement is 20% of position value, which matches their $1,340 deposit.
Without leverage, this position could drop 99% and still exist. With 1:5 leverage, a 20% drop equals $1,340 in losses, which is exactly the deposited margin. At that point, the position is liquidated.
The liquidation threshold is always 100% divided by the leverage ratio. At 1:5, it is 20%. At 1:10, it is 10%. At 1:25, it is 4%.
Here is what that looks like in practice: the trader enters a long position at $67 per unit, controlling 100 units at $6,700 total. Their liquidation price is $53.60, which is 20% below entry. If price drops to $53.60, the position closes automatically and the $1,340 margin is lost.
For a full breakdown of how leverage affects position size and margin, see the introductory guide to leverage in trading.
Before entering any leveraged position, find your ratio in this table. The percentage shows the maximum adverse move your position can survive before liquidation.
| Leverage ratio | Adverse move to liquidation |
|---|---|
| 1:2 | 50% |
| 1:3 | 33% |
| 1:5 | 20% |
| 1:10 | 10% |
| 1:25 | 4% |
| 1:50 | 2% |
| 1:100 | 1% |
At 1:100 leverage, a 1% move against the position triggers liquidation. Normal intraday volatility on most assets exceeds this. Positions at extreme leverage can be liquidated within minutes of opening.
To find your exact liquidation price for a specific entry, use the liquidation price calculator.
The percentages in this table are not buffers. They are the exact points where your position stops existing. At 1:25 leverage, a 4% move is not close to liquidation. It is liquidation. Know this number before you enter, not after price moves against you.
Most liquidation events trace back to the same structural issues: oversized positions, unclear margin allocation, and no defined exit rules. Each is preventable.
These examples show what the math looks like when it catches up. In both cases, the trader knew leverage amplifies gains. What they missed was how fast it amplifies losses. The liquidation price was always there. They just did not check it before entering.
Two common liquidation scenarios, anchored to the threshold table above.
A trader deposits $1,480 and opens a long position using 1:8 leverage. The liquidation threshold at 1:8 is 12.5%. The chart shows a drop of approximately 18% during a panic selloff.
At 1:8, a 12.5% drop liquidates the position. The 18% drop exceeds this threshold. The position is closed automatically and the $1,480 margin is lost.
A stop-loss at 10% below entry would have closed the position for a $1,184 loss, preserving $296. Without the stop, the entire margin disappeared.
A trader shorts an asset at $142 with $920 margin at 1:6 leverage, controlling a $5,520 position. The liquidation threshold for a short at 1:6 is approximately 16.7% above entry, placing liquidation at $165.70.
The market consolidates, then breaks upward. The trader holds, expecting reversal. Price reaches $166 and the position is liquidated.
Short positions against an established uptrend carry amplified liquidation risk. The threshold sits above the entry price, meaning any continued upward movement accelerates toward forced closure.
Related: Short selling with leverage
The exchange closes your position automatically and takes the remaining margin. The position no longer exists and the margin allocated to it is lost. If the platform has negative balance protection, you do not owe additional money beyond your deposit.
Yes. Higher leverage moves the liquidation price closer to entry. At 1:10 leverage, a 10% adverse move triggers liquidation. At 1:100, a 1% move is enough.
Yes. Higher leverage reduces the buffer between entry price and liquidation price. The position becomes more sensitive to normal market volatility.
This depends on whether the broker has negative balance protection. Most retail platforms cap losses at the deposited amount. Without this protection, extreme slippage or gaps can create a negative balance that the trader owes.
Lower leverage ratios and isolated margin reduce liquidation risk. Stop-losses set inside the liquidation price close the position before forced closure. Monitoring margin ratio in real time allows traders to add funds or reduce size before the threshold is reached.
A margin call is a warning that equity is approaching the maintenance margin threshold. Liquidation is the actual forced closure of the position. A margin call gives the trader time to add funds or reduce size. Liquidation does not.
Liquidation is mechanical. It triggers at a fixed threshold determined by the leverage ratio. At 1:10, that threshold is 10%. At 1:25, it is 4%. The number does not move.
Traders who avoid liquidation treat this threshold as a constraint, not a distant possibility. They size positions so that normal volatility cannot reach it. They set stops well inside it. Everything else follows from knowing that number before the trade opens.
The tools exist: the threshold table above, the liquidation price calculator, isolated margin to contain risk. Liquidation is preventable through structure, not luck.
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
