What Is Liquidation? Definition & Example

Liquidation is what happens when a leveraged position runs out of the collateral supporting it. Rather than let an account go negative, the exchange force-closes the position at market — and charges a liquidation fee on top. It is not a penalty for being wrong; it is the mechanism that keeps the exchange solvent when a trader cannot cover their own losses.

The trigger price follows directly from leverage. A rough estimate for a long is entry × (1 − 1 ÷ leverage), so a 10x long liquidates around 10% below entry and a 25x long around 4% below. The true price sits slightly further out because maintenance margin is smaller than initial margin, but the approximation is close enough to plan with.

What catches people is that the relationship is not linear in any useful sense. Every doubling of leverage halves your breathing room. At 5x you have 20% of margin for error — most ordinary drawdowns are survivable. At 50x you have 2%, which is inside the noise of a normal trading session on almost any asset. Above roughly 20x you are no longer betting on direction, you are betting that short-term randomness does not touch a very nearby price.

Three things quietly move your liquidation price after you open. Funding payments reduce margin over time, dragging liquidation toward current price on long holds. Cross-margin mode shares one collateral pool across every position, so an unrelated losing trade pulls this one closer too. And adding margin works in your favour, pushing liquidation away without changing position size.

The practical rule: your stop loss must trigger before liquidation, always. If liquidation sits closer to entry than your stop, the exchange decides your exit instead of you and you pay extra for it. Roughly twice the stop distance is a reasonable buffer.