The risk of forced liquidation is unavoidable in contract trading, but with proper risk management and strategies, this risk can be significantly reduced. Whether you are a beginner or an experienced trader, it is important to stay steady and ensure that your trading strategy matches your risk tolerance.
BitDa uses the mark price to avoid forced liquidations caused by insufficient liquidity or market manipulation. The trigger effect for forced liquidation varies depending on the leverage model (isolated margin / cross margin):
Forced Liquidation in Isolated Margin Mode
In isolated margin mode, forced liquidation occurs when the account margin ratio of a position ≥ 100% (i.e., the margin balance is equal to or less than the position’s maintenance margin).
In isolated margin mode, each position has its own independent account margin ratio and whether a position triggers forced liquidation is judged independently for each position.
Account Margin Ratio = Position Margin Balance / Position Maintenance Margin
Note: If a user holds a two-way position in isolated margin mode, the two positions are independent, and extreme market fluctuations may cause both positions to be forcefully liquidated.
Forced Liquidation in Cross Margin Mode
In cross margin mode, all positions share the account's margin and the account margin ratio is unified. Unrealized profits and losses are included in the total margin balance and forced liquidation is triggered when the margin ratio ≥ 100%.
Account Margin Ratio = Account Margin Balance / Total Maintenance Margin
Account Margin Balance = Funds allocated for cross margin in the USDT balance + Total unrealized profit from cross margin
Total Maintenance Margin = The sum of all positions’ maintenance margins in the cross margin mode
Forced Liquidation Process
Trigger Conditions:
1. When the account margin ratio ≥ 100%, the system will trigger forced liquidation.
2. Cancel Unfilled Orders: The system will cancel all unfilled orders (including strategy orders).
3. Adjust Risk Limit for Ladder Liquidation: The system will lower the risk limit for the contract position and the part of the position that exceeds the limit will be forcefully liquidated.
4. Stop Liquidation: During the ladder liquidation process, the system will check if the account margin ratio falls below 100%. If it does, the liquidation stops. If not, the risk limit will continue to be lowered, and the process will repeat until the margin ratio falls to 100% or below, or until all positions are liquidated.
Notes on Forced Liquidation:
1. After triggering forced liquidation, the system will place orders based on the position's bankruptcy price. For details on bankruptcy price calculation, refer to: Forced Liquidation Price and Bankruptcy Price.
Two possible situations after forced liquidation:
If the actual execution price is better than the bankruptcy price, the system will execute at the market price and liquidate the remaining margin, ending the process.
If the actual execution price is worse than the bankruptcy price and the mark price breaches the bankruptcy price, the insurance fund and the auto-deleveraging (ADL) system will be used. If the breach does not occur, the position will be locked until the order is executed.
Note: Placing orders at the bankruptcy price is not part of the forced liquidation process; it is only a factor set within the forced liquidation process.
2. In Isolated Margin Mode, since the margin for each position is calculated independently, there is no selection order for forced liquidation contracts.
In Cross Margin Mode, the order of forced liquidation is arranged from the most liquid market to the least liquid.
For example, if multiple contracts are held during liquidation, the system will prioritize liquidating the most liquid contracts. If, after liquidating a market, the margin ratio is still above 100%, the next market contract will be liquidated.
If, at any point during the liquidation process, the margin ratio falls below 100%, forced liquidation will stop.
Note: Detailed records of forced liquidation can be viewed in the "Liquidation History."
Frequently Asked Questions
Q1: How can I reduce the risk of forced liquidation?
Reasonably select leverage: The higher the leverage, the higher the risk. Beginners are advised to start with lower leverage to allow more time to adjust positions or add margin in case of market fluctuations.
Closely monitor the mark price: The mark price is used to calculate profits, losses, and margin ratios. It reflects the current reasonable market price based on the spot index and premium index. Monitoring changes in the mark price helps determine when to adjust positions or add margin.
Set stop-loss and take-profit orders in advance: These can automatically execute during sudden market movements, helping to prevent further losses or lock in profits. This function is particularly useful for users who cannot constantly monitor the market.
Manage positions wisely: Avoid putting all funds into a single contract. Diversifying positions reduces the impact of market fluctuations on the account, thus reducing the risk of forced liquidation.
Add margin in a timely manner: Keep track of your positions and adjust strategies or add margin when adverse market changes occur to effectively prevent forced liquidation.
Q2: What is the difference between forced liquidation in isolated margin and cross margin modes?
Isolated Margin Mode: Each position's margin is calculated independently. Forced liquidation losses only affect the margin for that specific position. For example, if you open a position with 100 USDT at 10x leverage, only 10 USDT is required as margin. If the position is liquidated, the maximum loss is limited to 10 USDT.
Cross Margin Mode: All positions share a unified margin pool. During forced liquidation, both profitable and losing positions may be affected. The system liquidates positions in order of market liquidity (high to low). After liquidation, the account may either: (1) Have all positions closed, or (2) Retain some positions, depending on whether the margin ratio recovers to 100% or below.
Q3: What is the insurance fund, and how does it relate to forced liquidation?
The insurance fund consists of remaining funds from forced liquidation. If the execution price is better than the bankruptcy price, the surplus is added to the insurance fund. If the mark price breaches the bankruptcy price but the position cannot be liquidated, the insurance fund covers the loss.
Q4: What is the process of auto-deleveraging?
After forced liquidation, if the market cannot absorb remaining positions and the insurance fund is insufficient to cover losses, the auto-deleveraging (ADL) system selects the most profitable opposing positions for reduction.