Traders often face liquidation in cryptocurrency futures. Find out How a Liquidation Order Is Executed.
When the margin balance is lower than the maintenance margin, the forced liquidation will be carried out. The forced liquidation price refers to the price at which a trader’s position triggers a forced liquidation.
The bankruptcy price is the price at which the trader loses an amount equal to the value of the deposited collateral or the initial margin amount.
For forced liquidation orders, the liquidation price corresponds to the stop loss price, while the bankruptcy price is the limit price used when the order is executed.
Forced liquidation is commonplace for cryptocurrency contract traders. Beginners who are not familiar with cryptocurrency derivatives may be confused about performing a liquidation on an open position.
Binance Futures considers both the forced liquidation price and the bankruptcy price when placing a forced liquidation order. They are two important price levels that traders should be aware of when trading perpetual contracts. This article explains the effect of forced liquidation price and bankruptcy price on forced liquidation order.
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Interpretation of basic knowledge of forced liquidation
When the margin balance is lower than the maintenance margin, the forced liquidation will be carried out. Margin balance refers to the sum of wallet balance and unrealized profit and loss, while maintenance margin refers to the minimum amount of margin that a trader must maintain in order to avoid liquidating a contract position.
Binance futures are forced to liquidate according to the mark price, which refers to the estimated true value of the contract. The mark price takes into account the fair value of the asset to prevent unnecessary forced liquidation when the market fluctuates. The latest price refers to the latest price of the Binance Futures contract.
Forced liquidation price and bankruptcy price
The forced liquidation price refers to the price at which a position triggers a forced liquidation. This threshold is affected by multiple factors, including the leverage used, the maintenance margin rate, the current price of the cryptocurrency, and the trader’s account balance.
The bankruptcy price is the price at which the trader loses an amount equal to the value of the deposited collateral or initial margin. Starting from this price, the margin balance of the user who is forced to close the position will be zeroed.
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How to force close an order?
How to force close orders at these two prices will be explained below. In actual operation, the forced liquidation order is similar to the entrusted limit order at the bankruptcy price. For a better illustration, we regard the steps of executing a liquidation order as executing a stop loss order in two steps.
For Take Profit/Stop orders, you select the stop price (last price or mark price) and the limit price at which the order will be executed. When your position reaches the stop price, a limit order is triggered and executed at the limit price.
We regard the forced liquidation order as a stop-loss order with the trigger price as the mark price. When your position reaches the mark price, a stop loss order is triggered. For forced liquidation orders, the liquidation price is the stop loss price, and the bankruptcy price is the limit price used when the order is executed.
Therefore, when the contract price is greater than the forced liquidation price, the forced liquidation starts. The bankruptcy price is the limit price used when the user’s deposit amount is liquidated.
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Insurance fund
Binance Futures protects bankrupt traders from losses with an insurance fund and guarantees successful traders full profits.
As mentioned above, when the collateral amount of the trader is less than the maintenance margin, the trader will be forced to close the position. When the trader is forced to close the position and cannot sell the position or the balance of all position accounts is negative, the trader will be declared bankrupt. In this case, Binance will control the remaining position.
Assume that the price at which the trader closes the position is higher than the bankruptcy price (i.e. the trader’s loss does not exceed the initial margin). In this case, the balance of funds will be fully transferred to the insurance fund.
But if the liquidation price is lower than the bankruptcy price, the trader loses more than their initial margin. In this case, the insurance fund will cover the deficit.
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Conclusion
Before trading in cryptocurrency derivatives, traders should understand the concept of forced liquidation and know how to prevent it. Forced liquidation occurs when an individual fails to meet the margin for leveraged positions required by the market.
To avoid forced liquidation, it is best to keep a close eye on margin rates, use leverage responsibly, avoid accumulating too many contracts in losing positions, and use trading tools such as stop-limit orders.
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Please check Binance official website or contact the customer support with regard to the latest information and more accurate details.
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Comment by Hans
April 24, 2024
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