What is a liquidation?

The threshold that matters

Two margin numbers govern a leveraged position. Initial margin is what is needed to open it. Maintenance margin is the lower level the position must stay above to remain open.

As price moves against a position, unrealised loss eats into collateral. When the remaining collateral falls to the maintenance requirement, the venue closes the position. The liquidation price is simply the price at which that happens, and it is knowable in advance — every venue displays it.

Higher leverage moves the liquidation price closer to the entry price. At 2x leverage a position can absorb a roughly 50% adverse move; at 20x, roughly 5%; at 50x, roughly 2% before fees. This is the actual meaning of leverage risk, and it is arithmetic rather than opinion.

Why liquidations cluster

Traders do not choose liquidation prices at random. They cluster below obvious support and above obvious resistance, because entries cluster there and common leverage settings are round numbers.

When price reaches such a cluster, the liquidations execute as market orders in the same direction as the move. That pushes price further, reaching the next cluster, which liquidates more positions. This feedback loop is what produces the vertical candles that appear on charts with no obvious news behind them.

The size of the potential cascade is roughly what open interest measures. Heavy open interest concentrated on one side, with funding confirming that side is crowded, is the setup for a large cascade.

Partial versus full liquidation

Not every liquidation closes the whole position. Many venues reduce a position in stages, closing enough to restore the margin ratio and leaving the remainder open. This is better for the trader — some exposure survives — and better for the market, since it removes less liquidity at once.

Whether a venue does this, and at what increments, is a meaningful difference between platforms that rarely appears in feature comparisons.

When collateral is not enough

In a fast move, a position can be closed at a price worse than the point where its collateral ran out. The resulting shortfall is a real loss that has to be absorbed.

Protocols hold an insurance fund for exactly this, built from liquidation fees over time. If a shortfall exceeds the fund, the loss is socialised — typically by clawing back from profitable traders on the other side, or by charging it to liquidity providers, depending on the design.

A venue with a thin insurance fund relative to its open interest carries more of this risk than the interface suggests.

What reduces the risk

Lower leverage moves the liquidation price further away, which is the only change that addresses the cause rather than the symptom. Isolated margin contains the damage to one position instead of the whole account. A stop-loss closes a position on your terms at a price you chose, rather than the protocol closing it at whatever the book offers.

None of these eliminate the risk. In a gap move a stop can fill far below its trigger, and in extreme conditions even conservative leverage is not safe.