Liquidation is the forced closure of a leveraged trading position when your losses consume your margin (collateral) to the point where it can no longer support the trade. It's one of the most important concepts to understand before trading perpetual futures, because getting liquidated means losing your entire margin on that position.

How Liquidation Works

When you open a leveraged position, you put up margin as collateral. The exchange uses this margin to cover any losses on your trade. As the price moves against you, your unrealized losses grow and eat into your margin.

Every position has a liquidation price — the exact price level at which your remaining margin falls below the maintenance margin requirement. When the market reaches that price, the exchange automatically closes your position to prevent further losses.

Here's an example:

1. You open a long position on BTC at $60,000 with $1,000 margin and 20x leverage
2. Your position size is $20,000
3. Your liquidation price is approximately $57,000 (a ~5% drop)
4. If BTC falls to $57,000, your position is automatically closed and you lose your $1,000 margin

The exact liquidation price depends on the exchange's maintenance margin requirements and fee structure, but the principle is the same everywhere.

Initial Margin vs. Maintenance Margin

Two margin thresholds matter for liquidation:

• Initial margin — the minimum collateral required to open a position. At 20x leverage, this is 5% of the position value.
• Maintenance margin — the minimum collateral required to keep the position open. This is typically lower than the initial margin (often 0.5%–2% depending on the asset and position size).

Liquidation triggers when your margin balance drops to the maintenance margin level — not when it hits zero. This buffer exists so the exchange can close the position before it goes into negative equity.

What Happens During Liquidation

When your position is liquidated:

1. The exchange closes your position at the current market price
2. Your remaining margin is used to cover the loss
3. Any leftover margin after covering losses and liquidation fees is returned to your account (on some exchanges)
4. On others, your entire margin for that position is forfeited

Some exchanges use an insurance fund to cover cases where liquidations happen during extreme volatility and the closing price is worse than the liquidation price. This prevents socialized losses across other traders.

How to Avoid Liquidation

Liquidation is not inevitable — it's the result of insufficient risk management. Here's how to protect yourself:

Use Lower Leverage

The single most effective way to avoid liquidation is to use less leverage. Lower leverage means your liquidation price is further from your entry, giving the trade more room to fluctuate.

| Leverage | Approximate distance to liquidation | | -------- | ----------------------------------- | | 5x | ~20% adverse move | | 10x | ~10% adverse move | | 20x | ~5% adverse move | | 50x | ~2% adverse move | | 100x | ~1% adverse move |

Set Stop-Losses

A stop-loss order automatically closes your position before it reaches the liquidation price. Place your stop-loss at a level that represents an acceptable loss — well above (for longs) or below (for shorts) your liquidation price.

Size Positions Appropriately

Never risk your entire account on a single trade. A common rule of thumb is to risk no more than 1–3% of your total account value on any single position. This way, even if a trade goes wrong, your account survives.

Add Margin When Needed

If a trade moves against you but you still believe in the thesis, you can add more margin to the position. This pushes your liquidation price further away. However, be cautious — adding margin to a losing trade can turn a small loss into a much larger one if the thesis is wrong.

Monitor Positions Actively

Don't open a leveraged position and walk away. Crypto markets trade 24/7, and significant price moves can happen at any time. On platforms like Legend, real-time PnL tracking and position monitoring tools help you stay on top of your exposure.

Liquidation in Competitive Trading

In Legend's Arena duels, getting liquidated doesn't just cost you money — it effectively hands the win to your opponent. Competitive traders treat liquidation avoidance as a core strategic skill. Managing leverage, setting protective stops, and sizing positions to survive volatility are just as important as picking the right direction. The leaderboard rewards consistency, and nothing destroys consistency faster than repeated liquidations.