What Is Liquidation Price? How It Works With Exmaples

Liquidation price explained

The liquidation price is the distance from the entry price of your leveraged position to where it gets liquidated.

Liquidation only applies when you’re trading with leverage or borrowed exposure. Once you use leverage, your position has a defined liquidation point, even if it’s far from the entry price.

At a ratio of 1:2, the distance to your liquidation price will be 50% of your entry price.

At a basic 1:2 multiplier, the buffer is roughly half of the entry price. In real markets, the exact liquidation level may change based on instrument rules, fees, and how the platform handles margin.

Spot trading doesn’t have liquidation, but you can still lose almost all capital if the market drops. Liquidation is a separate risk specific to leveraged products.

Your position can fall indefinitely, but it can never get liquidated.

Now, below is a chart of BNB/USD to illustrate how liquidation price works at a 1:2 ratio.

The entry price of the trade is $277 and with a 1:2 ratio, the distance to your liquidation price is 50%.

This means that once you reach a loss of -50% with a ratio of 1:2 your position will get liquidated.

As you increase the multiplier, the distance from your entry price to the liquidation price shrinks.

• At a leverage ratio of 1:3, your liquidation price will be 33% from your entry price.
• At a leverage ratio of 1:4, your liquidation price will be 25% from your entry price.
• At a leverage ratio of 1:5, your liquidation price will be 20% from your entry price.

You can see how the distance shrinks with the increase of your multiplier.

Each broker uses its own rules, but the same principle holds: more leverage means a thinner margin buffer, and a much tighter liquidation distance.

The table below shows ratios from 1:1 leverage to 1:100 leverage with the corresponding price of liquidation.

For each position, are assume that the trader is trading BTC/USD and the entry price will always be $20.000. From here we get the liquidation price.

To find out the liquidation price for a ratio of more than 1:100 see the formula below.

Why does it exist in the first place?

The meaning of the liquidation price is:

• To indicate at which price level your losses would mount up to the total value of your account balance.
• To give a representation of the maximum risk for each position.
• To help traders adjust their risk profile.

Two factors play a big role in why the liquidation price exists in the first place.

This concept would not exist without credit and how margin accounts function.

When you open a position with a multiplier you are opening a position that is larger than your total account balance.

Liquidation price is a factor since all your losses are deducted from your margin balance and not the total position size including borrowed capital.

Suppose you have $800 in your forex account and you enter a trade with a 1:2 multiplier.

This would give you a total position value of $1600 which is twice the size of your initial deposit.

Since your account balance can only cover losses up to $800, your position will get closed out when this loss has been reached, which is at -50% of the total trade value of $1600.

On the contrary, when you trade without borrowed funds, your account balance will be able to cover all the losses until the underlying asset falls to literally $0.

How liquidation works in leveragd trading

Liquidation is an automatic process that is controlled and executed by the broker.

When your available margin can no longer support the position, the exchange closes it automatically. Some platforms stop at zero balance, others may allow losses beyond your deposit if they don’t offer negative balance protection.

Once the liquidation is in process, your open positions will be sold back to the market with a market order.

Before a liquidation, the trader will receive a warning signal called a margin call.

This warning is meant to warn the trader that the open losses are close to reaching the full value of the account.

If nothing is done to prevent further losses the account will get liquidated once the losses reach the threshold.

A practical way to reduce liquidation risk is to know where margin calls happen before entering a trade.

This can be done by using a margin call calculator.

Examples that describe liquidation

I will give you two different examples that describe this concept.

In the first example, Trader A will use a ratio of 1:25 and in the second example, Trader B will use a ratio of 1:175.

Example 1

Trader A is trading Bitcoin with a ratio of 1:25.

The current price of Bitcoin is $19,419.

If we use the same formula as above the liquidation price, in this case, would be:

100 / 25 = 4%

$19,419 x 0.04 = $776.50

$19,419 – $776.50 = $18,642.50

Example 2

Trade B is trading the Nasdaq index with a ratio of 1:175.

The current price of Nasdaq is $10,652.

This example shows a simplified version of how liquidation moves relative to leverage. Actual platforms use their own formulas that account for maintenance margin, fees, and risk policies.:

100 / 175 = 0.57%

$10,652 x 0.0057 = $60,70

$10,652 – $60,70 = $10,591.30

How to prevent blowing up your account

There are several ways to prevent liquidation depending on what market and what kind of broker you choose.

Here are practical rules traders use to reduce liquidation risk:

1. Use a stop loss – A stop loss is a protective risk management tool that prevents further losses from happening. With a stop loss you can choose the maximum loss per position either with a dollar value or with a percentage value.
2. Trade with a lower leverage ratio – If you have read this article from the top you will begin to understand that the risk of getting liquidated increases with increased margin. Thus, using a lower leverage ratio will significantly reduce the chances of getting liquidated.
3. Use isolated margin when possible – Isolated margin is a way of isolating all losses to one position only. When isolated margin is used, only that one position can get liquidated. This prevents the whole account from getting liquidated from one bad trade. The difference between cross margin and isolated margin is how the margin requirement is shared.
4. Trade fewer markets – When trading fewer markets it is easier to maintain control over your positions and your losses. Traders who spread attention across many markets with high leverage often face liquidation more frequently.
5. Learn how to calculate leverage – By calculating your margin before you enter the market you can set yourself up for success. This is one of the best ways to control your positions and risk in general.

How to figure out the loss

There are two ways of finding out the liquidation loss.

It can either be an account-wide liquidation or a position liquidation.

1. Full account liquidation – If your total account suffers a liquidation then the total loss will be the amount that you have deposited into your account.
2. Position liquidation – If your position gets liquidated then the total amount is the margin requirement that went into opening that position.

If your total account balance is $800 and your whole account gets liquidated then your total loss is $800.

However, if your total account balance is $800 but you only use $200 as margin requirement and your position gets liquidated then your total loss would be $200.

Can you get liquidated in spot trading?

Spot markets don’t use borrowed exposure, so there is no forced liquidation. You can still lose most or all of your position if the market drops significantly, but it won’t be closed by an exchange.

Only a leveraged position can get liquidated.

Positions in spot trading can fall in price and lose as much as 99.99% until the value of the asset hits zero in value.

To understand this concept further read our guide: Differences between spot and leverage markets