How to Use Liquidation Levels to Your Benefit

In futures trading, liquidation levels are specific price points where your position is automatically closed by the exchange to prevent further losses. This occurs when your margin balance (the collateral you provide) drops below the required maintenance margin due to unfavorable price movements.

How Liquidation Works

Initial Margin: This is the margin you need to open a leveraged position. For instance, with 10x leverage, if you open a $100 trade, you only need $10 as the initial margin.

Maintenance Margin: This is the minimum margin required to keep the position open. If your margin falls below this due to price movement, your position will be liquidated.

Liquidation Price: The price at which your position will be liquidated. This level depends on:

The leverage used.Entry price of your trade.Maintenance margin requirement set by the exchange.

Example of Liquidation

Assume you go long (buy) on Bitcoin at $30,000 using 10x leverage with $100:

You control a $1,000 position with $100 initial margin.If Bitcoin drops to around $27,500, your margin balance may fall below the maintenance margin, and the exchange will liquidate your position to protect itself from further losses.

How to Use Liquidation Levels to Your Benefit

Understanding liquidation levels is crucial to avoid unnecessary losses and even take advantage of others' liquidation points:

1. Avoid Liquidation with Proper Risk Management

Use Stop Loss Orders:Always set a stop-loss well before the liquidation level to minimize losses. This allows you to exit the trade early rather than risk liquidation and potentially losing all your margin.Lower Leverage:The higher the leverage, the closer the liquidation level is to your entry price. Lower leverage gives more breathing room and reduces the likelihood of liquidation.Add Margin When Necessary:If your trade approaches the liquidation level but you believe the market will reverse, you can add more margin to prevent liquidation. This increases your position’s sustainability.

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