Perpetual Swap Liquidation Mechanics and Why to Set Stop Losses
Summary
The article distinguishes bankruptcy price, where losses consume the trader’s collateral, from liquidation price, where the exchange begins closing the position. It explains that liquidation occurs earlier to leave a buffer for the exchange’s liquidation process. The example describes a leveraged BTC/USDT position and illustrates how maintenance margin, collateral, position size, side, and entry price affect the relevant thresholds.
Its practical lesson is to define a trade’s invalidation point with a manual close or stop loss placed before liquidation, rather than relying on forced closure. Higher leverage brings liquidation closer and can increase fees and exposure to auto-deleveraging during liquidation sequences. The article offers a conceptual example, not a general calculation method or a comparison based on measured outcomes. Actual thresholds depend on exchange rules and position details, so the figures given should not be treated as universal. The document also includes promotional material and a general disclaimer.
Key ideas
- Bankruptcy price marks when losses equal the deposited collateral, while liquidation price is where the exchange starts closing the position.
- Liquidation typically precedes bankruptcy to preserve a margin buffer for the exchange’s closing process.
- Leverage, collateral, position size, direction, entry price, and maintenance margin affect liquidation thresholds.
- A planned stop loss before liquidation can avoid relying on forced closure and its associated costs.
- Greater leverage moves liquidation closer and can raise fee and auto-deleveraging exposure.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.