In futures trading, the first number you need to know is not your potential return but your liquidation price. Raising leverage to 10x, 20x or 50x lets you open a sizeable position with a small amount of margin. The trade-off is that even a small move against you can grow your losses quickly.
But even a small move against you sharply raises the chance of liquidation. In this article, we'll look at what liquidation is, when it happens, and how to calculate the liquidation price.
What is liquidation?
Liquidation is the exchange forcibly closing your position when your remaining margin can no longer support it.
For example, with $1,000 and 10x leverage, you can open a position worth about $10,000. If the price moves 10% against you, that's a loss of about $1,000.
Because you used 10x leverage, that's roughly a 100% loss on your margin. So the position is closed before the loss can grow any larger.
In practice, liquidation usually comes a little earlier than that, because there's a minimum amount that must stay in the position to keep it open. This is called the maintenance margin.
In short, once losses on your position push your margin down to the maintenance margin level, the exchange starts the liquidation process.
- To liquidation
- -9.5%
- P&L
- 0.0%
- Status
- Open
Which price is liquidation based on?
This is where the mark price comes in. It's also called the market reference price. Exchanges such as Binance don't decide liquidations on the last traded price alone.
For example, say BTC is trading around $100,000 in most markets, but a sudden large sell order on one exchange fills at $97,000.
If liquidations were based on that price alone, a brief price distortion could force positions closed. So exchanges calculate a separate market price, the mark price, from spot prices and data from several markets.
The last price is the most recent actual trade, while the mark price is the reference used for unrealized P&L and liquidation. Liquidation is generally based on the mark price.
How much room does high leverage leave you?
The higher the leverage, the less initial margin you need: about 10% of the position's value at 10x, about 5% at 20x and about 2% at 50x.
But high leverage comes at a cost. The price move you can withstand shrinks in step with it.
| Leverage | Initial margin | Price move you can take |
|---|---|---|
| 5x | 20% | about 20% |
| 10x | 10% | about 10% |
| 20x | 5% | about 5% |
| 50x | 2% | about 2% |
| 100x | 1% | about 1% |
How do you calculate the liquidation price?
Simplifying a USDT isolated-margin position, you can calculate a long's liquidation price like this:
Long liquidation price ≈ entry price × (1 − 1/leverage + maintenance margin rate)
For example, say you open a 10x long on BTC at $100,000 and the maintenance margin rate is 0.5%. That gives 100,000 × (1 − 0.1 + 0.005) = about $90,500.
Put another way, you can withstand a drop of about 9.5% from your entry. Under the same conditions, at 20x liquidation could come at about $95,500, and at 50x at $98,500, a drop of only about 1.5%.
Shorts work the same way in reverse. Short liquidation price ≈ entry price × (1 + 1/leverage − maintenance margin rate). Keep in mind this is an approximation to help you understand the structure; the exact formula varies by exchange.
Why is the real liquidation price slightly different?
Some exchanges factor in position size, added margin and trading costs, not just leverage and the maintenance margin rate, when calculating the actual liquidation price of a futures contract.
The required maintenance margin can also change with position size. So even at the same 10x leverage, a small position and a large one don't have exactly the same liquidation conditions.
This is also why community calculators give slightly different numbers from your exchange screen. The most accurate figure is the liquidation price shown on your actual position screen.
How do isolated and cross margin differ?
Isolated margin uses only the margin assigned to that position. If you put 1,000 USDT into the position, only that amount is used.
Cross margin shares the account's available margin across positions. With plenty of spare funds, the same position can last longer; but a big loss on another position also raises the liquidation risk on your existing one. So with cross margin, it's hard to make simple calls like "it's 10x, so a 10% move means liquidation".
Do fees affect the liquidation price?
Yes. In futures trading you pay a trading fee when you open and when you close a position. Perpetual futures also have funding fees.
Most exchanges factor the trading cost of closing the position into the actual liquidation price. In other words, your margin doesn't just cover price losses. Fees and funding come out of it too.
What is the real danger of high leverage?
The biggest problem with high leverage isn't simply that losses grow faster. The price range you can withstand becomes far too narrow.
Say you go long BTC at $100,000 and it eventually rises to $110,000. You got the direction right.
But if it first dipped to $98,000 before rising, a 50x long may already have been liquidated. You can be right on direction and still lose money.
With high leverage, it's not enough to know where the price is going. You have to get the order of the moves right too.
A liquidation price is not a stop-loss
A stop-loss is you closing the position yourself at a price you set. Liquidation is the exchange closing it for you, by force.
If you go long BTC at $100,000 and would consider your call wrong below $98,000, then $98,000 is your stop-loss.
Just because your liquidation price is $95,000 doesn't mean you "can still hold on". The liquidation price isn't a stop-loss line; it's closer to the last zone where the position can still be kept open normally.
What should you calculate before entering a position?
In futures trading, it's better to set your loss limit before you look at the liquidation price. Decide the point at which you'll consider your call wrong, and calculate how much you'd lose if the price got there. Then size your position to fit that loss.
For example, if you've decided to lose no more than $100 on a single trade, you size the position based on the distance to your stop-loss.
Starting from "let's use 50x and see where the liquidation price is" turns risk management upside down.
The one thing to remember
Your liquidation price can't be calculated precisely from leverage alone. It depends on your entry price, maintenance margin rate, position size, added margin, trading costs, and whether you use isolated or cross margin.
Still, the inverse is a useful rule of thumb: at 10x a move of about 10%, at 20x about 5%, and at 50x about 2% is where the position gets liquidated.
In reality, the maintenance margin can bring liquidation even sooner. So raising leverage isn't simply about boosting returns. It narrows the range of prices you can survive when you're wrong.
Trading crypto assets carries the risk of losing your principal. This article is not investment advice, and actual liquidation prices may vary by exchange and position size.
Sources: Binance Futures Liquidation Protocols · Bybit Liquidation Price (USDT Contract)