What is liquidation and how to avoid it?

Liquidation is an unpleasant word for any trader, but it is a necessary function for the operation of a crypto exchange.

Liquidationis the forced closure of a trader's position due to the loss of all or almost all of the initial margin.In this way, the exchange insures its money borrowed for margin trading.When the price of the asset reaches the liquidation price, the trader's position is closed.

Initial margin and maintenance margin

Leverage trading is essentially trading with borrowed money to make more profits.For example, to open a $1000 margin position with 10x leverage, the initial margin, i.e. the money coming fromtrader should be $100. 

Initial marginis the amount that needs to be deposited into a margin wallet in order to open the selected position with the  desired leverage. 

Maintenance marginis the minimum required level of funds in the margin account to keep the position open and avoid liquidation.

It is obvious that the exchange is not interested in losing funds, and therefore there is a liquidation mechanism. She sells the borrowed coins at the current market price in order to get the funds back.

Partial liquidation

A partial liquidation is an attempt to partially close a position in order to reduce the total value of the contract.The system partially eliminates the difference between the contract value of the current position and the maximum value of the contract with a reduced risk limit.This allows traders to potentially not lose their position during volatile market movements.

Complete liquidation

Full liquidation occurs automatically when the asset reaches a certain price level. When this happens, the trader loses all of his margin and all active orders are canceled and deleted.

Initial margin can be depleted for two reasons: the use of leverage and the contract mechanism. 

Leverage means borrowing platform funds in order to enter a larger position than your own funds allow.

For example, a trader has 1 BTC on the availablebalance, but using 10x leverage, he can now open a position of 10 BTC. The exchange allows traders to borrow money only on the condition that they do not lose anything. Thus, while a trader can keep all the profit he would have made from his position, his margin is used by default in case of losses. Thus, if an exchange position loses a total of 1 BTC out of 10, the trader loses all of his initial margin.

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