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 trading with leverage or borrowed exposure. Once leverage is used, the position has a defined liquidation point, even if it’s far from the entry price.

At a ratio of 1:2, the distance to the liquidation price is 50% of the 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.

In spot trading, positions can fall indefinitely in value but cannot be liquidated. Liquidation is a separate risk specific to leveraged products.

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 the liquidation price is 50%.

This means that once the loss reaches -50% with a ratio of 1:2, the position gets liquidated.

As the multiplier increases, the distance from the entry price to the liquidation price shrinks.

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

The distance shrinks with each increase in 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, the trader is trading BTC/USD and the entry price is $20,000. From this, the liquidation price can be determined.

Liquidation Price Formula

To calculate the liquidation price for any leverage ratio, the following formula applies:

Liquidation Distance (%) = 100 / Leverage Ratio

Liquidation Price = Entry Price – (Entry Price × Liquidation Distance)

For example, at 1:100 leverage: 100 / 100 = 1%. A 1% move against the position triggers liquidation.

Actual platforms may adjust this calculation based on maintenance margin requirements, fees, and risk policies.

Why Does Liquidation Price Exist?

The meaning of the liquidation price is:

• To indicate at which price level losses would mount up to the total value of the 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 a position opens with a multiplier, the position is larger than the total account balance.

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

Suppose an account has $800 and a trade opens with a 1:2 multiplier.

This would give a total position value of $1,600 which is twice the size of the initial deposit.

Since the account balance can only cover losses up to $800, the position gets closed out when this loss has been reached, which is at -50% of the total trade value of $1,600.

On the contrary, when trading without borrowed funds, the account balance can cover all the losses until the underlying asset falls to $0.

How Liquidation Works in Leveraged Trading

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

When equity falls below the maintenance margin threshold, the exchange closes the position automatically. Some platforms stop at zero balance, others may allow losses beyond the deposit if they don’t offer negative balance protection.

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

Before a liquidation, the trader receives a warning signal called a margin call. Knowing how margin calls and liquidation differ helps you understand what happens at each stage.

This warning indicates that the open losses are close to reaching the full value of the account.

If nothing is done to prevent further losses, the account gets 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 of Liquidation

Below are two examples that illustrate this concept.

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

Using the formula 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

Trader 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 Traders Reduce Liquidation Risk

There are several ways to reduce liquidation risk depending on what market and what kind of broker is used.

Common risk management approaches include:

1. Stop-loss orders — A stop loss is a protective risk management tool that closes positions before losses reach the liquidation point. Stop losses can be set at a specific dollar value or percentage from entry.
2. Lower leverage ratios — The risk of getting liquidated increases with leverage. Lower ratios create a larger buffer between the entry price and the liquidation price, giving more room for normal price fluctuations.
3. Isolated margin — Isolated margin limits losses to one position only. When isolated margin is used, only that specific 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. Concentrated focus — Trading fewer markets makes it easier to maintain control over positions and losses. Traders who spread attention across many markets with high leverage often face liquidation more frequently.
5. Pre-trade calculation — Calculating margin and liquidation price before entering the market helps establish appropriate position sizes. This is one of the more reliable ways to manage position risk.

How to Calculate the Loss

There are two ways to calculate the liquidation loss.

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

1. Full account liquidation — If the total account suffers a liquidation, the total loss equals the amount deposited into the account.
2. Position liquidation — If a position gets liquidated, the total loss equals the margin requirement that went into opening that position.

If the total account balance is $800 and the whole account gets liquidated, the total loss is $800.

However, if the total account balance is $800 but only $200 is used as margin requirement and that position gets liquidated, the total loss is $200.

Can You Get Liquidated in Spot Trading?

Spot markets don’t use borrowed exposure, so there is no forced liquidation. Positions can still lose most or all of their value if the market drops significantly, but they 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% of their value until the asset hits zero.

To understand this concept further, see: Differences between spot and leverage markets

Conclusion

Liquidation price represents the boundary where a leveraged position ends. Higher leverage means a tighter boundary. At extreme ratios like 1:100 or 1:175, normal market volatility is enough to trigger liquidation within minutes.

Before entering any leveraged position, calculating the liquidation price reveals exactly how much room the position has before it gets closed. The liquidation price calculator automates this calculation for different leverage ratios and entry points.

The core principle: liquidation means losing 100% of the margin. There is no partial loss at liquidation. Position sizing and leverage selection determine whether normal market moves become account-ending events.