Liquidation
Liquidation is the forced close of a leveraged futures position by the exchange when the position's margin can no longer cover its loss. The price at which this happens is the liquidation price. A liquidated position usually loses most or all of its margin, and the exchange may charge a liquidation fee on top.
What sets the liquidation price
- Leverage: higher leverage puts the liquidation price closer to the entry.
- Maintenance margin: the minimum margin the exchange requires to keep a position open, set in tiers that rise with position size.
- Margin mode: with isolated margin only the margin of that position is at risk; with cross margin the account's balance backs it.
- Fees and funding paid while the position is open.
How to avoid it
Use a stop loss that closes the position well before the liquidation price, and keep leverage low enough to leave room between the two. A stop beyond the liquidation price never gets the chance to work.
On Algonney
Before every futures entry the platform estimates the liquidation price from the exchange's own margin tiers. The stop loss must sit inside that price with a safety buffer, or the trade is refused. The stop is placed on the exchange first. In backtests, liquidation is checked first on every bar, and a liquidation is recorded as the trade's exit reason, just as it would be live.
Related: leverage, stop loss, Spot vs futures and Crypto risk management.