Futures liquidation means that in cryptocurrency perpetual trading when the trader's margin value reaches the liquidation line specified by the trading platform, the trading platform will force the trader's position to be liquidated to prevent greater losses from occurring.
In cryptocurrency perpetual trading, traders usually need to pay a certain percentage of the margin when opening a position. When the market price fluctuates violently, if the value of the trader's margin cannot meet the liquidation line stipulated by the trading platform, the trading platform will force the trader's position to be liquidated to avoid the trader's excessive loss.
In the event of liquidation, the trading platform will automatically sell the trader's long position or buy the trader's short position to close out the trader's position. The liquidation price is usually calculated according to the regulations of the trading platform or the market index price.
It should be noted that the futures liquidation mechanism is a risk management tool established by the cryptocurrency futures trading platform to protect the interests of traders and the platform itself. Therefore, when conducting cryptocurrency futures trading, traders should understand the rules and mechanisms of futures liquidation, abide by the regulations of the futures trading platform, and conduct reasonable risk management.
The liquidation price is usually calculated according to the regulations of the trading platform or the market index price. The specific calculation method can vary depending on the trading platform. The following are two common calculation methods:
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Calculation method of liquidation price based on mark price: Mark price refers to a specific price index adopted by the trading platform to reflect the overall price trend of the cryptocurrency market. When a trader's maintenance margin rate is lower than a certain warning line, the trading platform will switch its position to the valuation model based on the mark price, and then calculate the liquidation price. The forced liquidation price is usually a certain percentage of the mark price, and the specific percentage varies according to the regulations of the trading platform.
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Give an example:
Assume that a cryptocurrency trading platform adopts a liquidation price calculation method based on the mark price, and the mark price is $10,000 per BTC perpetual. Trader A opens a long position of 10 BTC on the trading platform with a margin rate of 50%. Then trader A's initial margin is $10,000 x 10 BTC x 50% = $5,000.
If trader A's margin rate drops to 25% and reaches the liquidation line, the trading platform will force him to liquidate his position. At this time, the liquidation price is usually a certain percentage of the mark price. For example, if the trading platform stipulates that the liquidated price is 90% of the mark price, the liquidated price is $10,000 × 10 BTC × 90% = $9,000.
If trader A's position is profitable, and his account balance can support the maintenance margin rate to exceed the liquidation line, then liquidation will not happen. However, if the position loses money and the margin rate continues to drop below the liquidation line, the trading platform will force the position to be liquidated to protect the interests of the platform and other traders.
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The liquidation price calculation method is based on the contract index price: the contract index price is a price index calculated by the trading platform based on the real-time trading prices of multiple cryptocurrency exchanges. When a trader's maintenance margin rate is lower than a certain warning line, the trading platform will calculate the liquidation price based on the contract index price and the liquidation spread, where the liquidation spread is one of the basic parameters for cryptocurrency futures trading stipulated by the trading platform.
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Give an example:
Assuming that a cryptocurrency trading platform adopts a liquidation price calculation method based on the contract index price, the contract index price is calculated from the real-time transaction prices of multiple cryptocurrency exchanges. At this time, trader A opens a long position of 10 BTC on the trading platform, the margin rate is 50%, and the contract index price is $10,000 per BTC contract.
If trader A's margin rate drops to 25% and reaches the liquidation line, the trading platform will force him to liquidate his position. At this time, the liquidation price is usually calculated from the contract index price and the liquidation price difference. For example, the trading platform stipulates that the liquidation price difference is 100 US dollars, and the liquidation price is the contract index price minus 100 US dollars, that is, 10,000 US dollars - 100 US dollars = $9900.
If trader A's position is profitable, and his account balance can support the maintenance margin rate to exceed the liquidation line, then liquidation will not happen. However, if the position loses money and the margin rate continues to drop below the liquidation line, the trading platform will force the position to be liquidated to protect the interests of the platform and other traders.
Before trading cryptocurrency futures, traders should carefully read the trading rules and risk warnings of the trading platform, and choose the appropriate cryptocurrency perpetual trading platform and trading perpetual according to their own risk tolerance and investment strategy.
Astral uses a liquidation price calculation method based on the mark price. Traders should understand the rules and mechanisms and conduct reasonable risk management.