Trading crypto perpetual futures offers huge opportunities — but it also comes with risks. One of the most important concepts every trader must understand is liquidation.
Liquidation happens when a trader’s margin balance falls below the required level to keep their position open. If you don’t understand how it works, liquidation can wipe out your position in seconds.
This guide explains liquidation in perpetuals, why it happens, and how you can reduce the risk of it happening to you.
What Is Liquidation in Perpetual Futures?
Liquidation is when the exchange automatically closes your position because you no longer have enough collateral (margin) to cover potential losses.
Since perpetual contracts use leverage, even small market moves can cause big gains — or big losses. If the market moves against your trade and your margin can’t cover the loss, the system liquidates your position to prevent further losses.
👉 Simply put: liquidation is the platform's safety net against traders going into negative balances.
How Does Liquidation Work in Crypto Perpetuals?
You open a leveraged position
Example: 10x long on BTC at $60,000 with $1,000 margin.
Your position size = $10,000.
The market moves against you
If BTC drops enough that your unrealized loss approaches your margin balance, your position becomes at risk.
Liquidation is triggered
Once your balance falls below the maintenance margin level, the exchange force-closes your trade.
Your margin is lost
The collateral you posted (margin) is partially or fully taken, depending on how the liquidation engine works.
Key Terms to Know
Initial Margin – The collateral you put down to open a position.
Maintenance Margin – The minimum amount you must maintain to keep a position open.
Liquidation Price – The estimated price at which your position will be closed if the market moves against you.
👉 Most trading platforms display your liquidation price in real-time, so you always know the risk level of your trade.
Why Does Liquidation Happen?
Using High Leverage – The higher the leverage, the closer your liquidation price is to your entry.
Volatility – Crypto markets move fast, making liquidations more common than in traditional markets.
Insufficient Margin – If you don’t add margin when a trade moves against you, liquidation risk increases.
Example of a Liquidation
You go long ETH with $500 margin at 20x leverage → position size = $10,000.
ETH drops by just 5%.
Your loss = $500 (your entire margin).
Position is liquidated automatically, and you lose your margin.
How to Avoid Liquidation in Perpetual Futures
Use Lower Leverage – Reduce risk by not over-leveraging.
Add Margin (Top Up) – Keep your margin balance above maintenance levels.
Set Stop-Loss Orders – Close trades before liquidation hits.
Watch the Mark Price – Liquidations are usually triggered by the mark price, not the last traded price.
Manage Risk – Never risk more capital than you can afford to lose.
Final Thoughts
Liquidation is one of the biggest risks in trading crypto perpetual futures. It protects exchanges and the market, but it can also wipe out your position if you’re not careful.
By understanding how liquidation in perpetuals works — and managing leverage, margin, and risk — you can trade smarter and avoid unnecessary losses.
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