When preparing to trade margin, we need to consider several different factors that may affect the effectiveness of our investment. Today, however, we would like to focus on the Liquidation price term, which can effectively help you understand closing a position.
Liquidation price – what is it?
To put it simply, when our current portfolio balance drops below the required margin / margin for maintaining this position – the position is closed by the risk management system. In this situation, the liquidation price is the price at which the maintenance margin is not able to effectively cover our position. Any deposit we still have will be forfeited.
We can therefore say that the liquidation price is the result of some estimation of when our account is liquidated under certain market conditions.
All changes to deposit, withdrawal, trading and transaction requirements have an impact on the liquidation price. For example, accruing 0.01% interest within 24 hours will affect your balance and change the liquidation price.
Liquidation price – an example
As soon as the available balance drops below 0 due to changes in the market price of the derivative position, all open orders for the derivative position in that settlement currency are canceled.
If you are trading BTC / USD and the price is very close to the liquidation price, all open BTC / USD orders will be canceled. This is because your BTC balance should drop below 0.
We calculate the available balance as:
available balance = market balance – (hold + initial margin + appropriate margin)
- available balance is the amount that can be used for withdrawals, balance transfers and opening new orders,
- market balance is the balance plus / minus realized profit and loss (PnL),
- hold refers to the amount of funds needed to place a limit order – funds are released after filling or canceling the order,
- initial margin is the amount of funds needed to take a position.
How to protect yourself from liquidation of positions?
As a general rule, the best way to protect your funds from liquidation is to set a Stop Loss on your position. This will effectively help you exit your investment before the market reaches liquidation value. In addition, you can always lower the value of the leverage you use. The last way is to increase the value of your portfolio or decrease the value of the position. This will help to avoid liquidation and wastage of funds.
All these solutions can be used without any problems on margin trading platforms. An interesting solution for getting a feel for the conditions of margin trading is to use the option of trading without using leverage on Geco.one. Easy and fun UI helps investors to become familiar with this specific type of trading.