Liquidation of Positions on Online Exchanges: A Basic Guide for Crypto Traders

Cryptocurrency volatility is a double-edged sword. On one hand, it creates opportunities for profit; on the other, it poses serious risks. One of the main threats when trading on online exchanges is position liquidation. This phenomenon can lead traders to significant losses within minutes. Liquidations are especially dangerous when using leverage, as the market moves in an unexpected direction.

How Liquidation Triggering Works

The liquidation process begins when the asset’s price moves against the trader’s position, and their margin becomes insufficient to maintain the position. At this point, the exchange system sends an alert — a margin call — requesting additional funds to cover the position.

If the trader does not respond to the margin call or lacks funds, the position is automatically closed. This forced closure is what constitutes liquidation. The amount of loss depends on how far the price has moved from the entry point and what percentage of the initial margin was allocated to the trade.

A key feature of online exchange liquidations is that they happen instantly — within milliseconds. The trader may not even have time to realize what has happened. Additionally, exchanges charge a fee for automatic position closure, increasing overall losses.

Leverage: Why Traders Use It

Using leverage is attractive to many traders. It allows increasing the size of a position by borrowing funds. For example, with 10x leverage, a trader can control a position ten times larger than their actual deposit.

The appeal is clear: small market movements can generate significant profits. However, there is a downside. The same logic applies to losses. If the market drops by 5% with 20x leverage, the loss will be 100%, resulting in full liquidation.

That’s why risk management is critically important. Traders must understand that leverage is a double-edged sword. It offers the chance to earn quickly but also the risk of losing everything just as fast.

Liquidation Price and Margin Call

Every leveraged position has a set liquidation price. This is a critical level at which the position begins to close. The calculation of this level depends on several factors:

• Leverage size
• Current cryptocurrency price
• Remaining funds in the account
• Maintenance margin rate (usually 5-10%)

Before reaching the liquidation price on online exchanges, the system notifies the trader of a margin call. This is an intermediate step, providing a last chance to avoid losses. If the trader deposits additional funds, the position can be saved. If not, automatic closure occurs.

Two Types of Liquidation on Exchanges

In practice, there are two forms of liquidation. Their difference lies in the scale of position closure.

Partial Liquidation

Only part of the open position is closed. This occurs to reduce risk and decrease the margin required to maintain the position. Partial liquidation is often a voluntary action by the trader — they close part of the position themselves to avoid complete collapse.

Full Liquidation

This is the most serious scenario. All assets in the position are closed, and the entire margin is used to cover losses. Full liquidation is almost always forced — the exchange closes the position without the trader’s consent.

In some extreme cases, the account balance becomes negative. Here, exchange insurance funds come into play, compensating traders’ losses. However, these funds have limits, and in the most severe cases, the position can become completely bankrupt.

How to Avoid Position Liquidation

Fortunately, there are proven methods that significantly reduce the risk of liquidation.

First Method: Set a Risk Limit

Determine in advance what percentage of your trading balance you are willing to risk on a single trade. Professionals recommend risking no more than 1-3% of your balance per trade. This approach means that to lose all funds, you would need to lose 30-100 consecutive trades, which is highly unlikely even in volatile crypto markets.

This strategy allows you to stay in the game and provides time for learning and adjusting your approach.

Second Method: Use Stop-Loss Orders

A stop-loss is an automatic order that closes your position when a certain loss price is reached. Setting a stop-loss 2-3% below the entry price ensures that losses are limited even during sudden market movements.

While setting a stop-loss requires extra time, it pays off many times over. The crypto market can turn around within minutes, and without a stop-loss, the trader risks losing the position before noticing the change.

Online Exchange Liquidations: A Threat That Demands Respect

Liquidation remains one of the main dangers of trading with leverage. On modern online exchanges, this process is fully automated and can occur without warning within milliseconds.

However, the risk can be managed. Applying risk management rules, setting stop-loss orders, and maintaining disciplined position sizing greatly reduce the likelihood of liquidation. Remember, crypto trading is a marathon, not a sprint. Preserving capital is often more important than maximizing profit on each trade.

Frequently Asked Questions

What happens during position liquidation?

The exchange system automatically closes your position. You lose part or all of your margin, depending on how far the price has moved from the liquidation level.

Can I avoid liquidation after a margin call?

Yes. If you deposit additional funds into your account, the margin call is canceled, and the position remains open.

Why do exchanges charge a fee for liquidation?

The fee incentivizes traders to close positions themselves before they are automatically liquidated. This reduces system load and protects the interests of other participants.

How often does full liquidation of Bitcoin occur?

Bitcoin is one of the most volatile assets among cryptocurrencies. During sharp market movements, the number of liquidated positions increases significantly.

What is the liquidation price?

This is the price at which the exchange begins the automatic closing of your position. It is calculated based on leverage size, margin, and current market price.