Liquidations

Liquidation is the forced closure of a position when margin becomes insufficient. Understanding liquidations helps you manage risk effectively.

Why Liquidations Happen

When you open a leveraged position:

• You deposit margin as collateral

• Losses are deducted from your margin

• If margin depletes below maintenance level, liquidation triggers

This protects the system from bad debt when traders can't cover losses.

Liquidation Price

Your liquidation price is where losses consume your margin:

Long Position

Liq Price = Entry × (1 - Initial Margin % + Maintenance Margin %)

Short Position

Liq Price = Entry × (1 + Initial Margin % - Maintenance Margin %)

Example — Long 3x

Entry:       $225
Leverage:    3x (33.3% initial margin)
Maint Rate:  5%

Liq Price = $225 × (1 - 0.333 + 0.05)
          = $225 × 0.717
          = $161.33

Price needs to drop ~28% for liquidation at 3x.

Liquidation Process

1. Oracle price crosses liquidation level

2. Position flagged for liquidation

3. Liquidation engine takes over position

4. Position closed at market price

5. Remaining margin returned (if any)

Partial vs Full Liquidation

Depending on the platform configuration:

• Partial — Only enough is closed to restore margin ratio

• Full — Entire position is closed

Liquidation Penalty

A liquidation penalty may be charged:

Penalty = Position Size × Penalty Rate

This compensates:

• Insurance fund

• Liquidators who take over risky positions

• System maintenance

Avoiding Liquidation

1. Use Less Leverage

Leverage	Liq Distance	Safety
1x	~100%	Very safe
2x	~45%	Safe
3x	~28%	Moderate risk

2. Set Stop-Losses

Place stop-loss orders above your liquidation price:

Entry:          $225
Liquidation:    $213.75
Stop-Loss:      $218 (safer exit)

3. Monitor Margin Ratio

Keep margin ratio below 80%:

Margin Ratio	Status
< 50%	Healthy
50-80%	Caution
80-100%	Danger — reduce position
≥ 100%	Liquidation

4. Add Margin

Deposit more USDH to push liquidation price further away.

5. Reduce Position Size

Close part of your position to free up margin.

Liquidation Cascade Risk

In volatile markets:

• Many positions liquidate simultaneously

• Liquidation sales push price further

• More liquidations trigger

• "Cascade" effect

Protection:

• Use lower leverage

• Avoid crowded trades

• Keep stops above obvious levels

ETF-Specific Considerations

Market Gaps

ETFs can gap significantly at market open:

• Overnight news moves price

• No trading to reflect change

• Opens 3%+ away from close

Risk: Your stop might not execute if price gaps past it.

Mitigation:

• Use wider stops

• Lower leverage

• Consider closing before market close

Extended Hours Liquidity

During pre/post-market:

• Wider spreads

• Lower liquidity

• Potential for slippage on liquidation

What Happens to Your Funds

After liquidation:

1. Position closed at liquidation price

2. Penalty deducted from remaining margin

3. Balance returned if positive

4. Deficit covered by insurance if negative (bad debt)

Example

Initial Margin:     $100
Loss at Liq:        $85
Penalty:            $10
Returned:           $5

Insurance Fund

The insurance fund covers:

• Liquidation deficits (bad debt)

• Protects profitable traders

• Funded by liquidation penalties

A healthy insurance fund means the system can handle extreme events without socialized losses.

Monitoring Your Risk

The interface shows:

• Liquidation price — Price at which you're liquidated

• Distance to liq — How far current price is from liquidation

• Margin ratio — Current account health

Check these regularly, especially in volatile markets.