Mark price and margin modes
Liquidations often seem arbitrary, but they aren't. When your position is closed is decided by the mark price, maintenance margin and the margin mode you chose, not by the last price on your screen.
Learning objective: After this lesson you can explain why the mark price decides liquidation and what isolated and cross margin mean for your risk.
Liquidation isn't based on the price you last saw on your platform. Exchanges calculate it using a smoothed mark price that follows several large trading venues. This is meant to stop a single outlier on one exchange from needlessly destroying thousands of positions.
Liquidation Without a Touch
For you that means: your position can be liquidated even though your platform's chart never touched the liquidation price. The other way round, it sometimes narrowly survives even though your chart already went below.
Maintenance Margin
Then there's the maintenance margin. That's the minimum collateral a position always needs. If your money in the position falls below it, the position is closed before the collateral is completely used up. That's why liquidation comes a little earlier than the simple calculation of a hundred divided by leverage suggests.
The Margin Mode
The mode matters too. With isolated margin, only the money you assigned to this one position is at stake. Your loss is limited, but liquidation comes earlier. With cross margin, your whole account balance is at stake. The position holds out longer, but in the worst case it takes the whole account with it.
Anyone who mixes up the two modes often wonders afterwards why a single trade hit their whole balance when only a small part was meant as the stake. The typical case: the position ran in cross mode because the platform had it set that way by default, not because anyone chose it deliberately. So check the setting before every trade.
Funding and Collateral
Many platforms deduct funding payments directly from the position's collateral rather than from the rest of your balance. If you hold a position for days, your liquidation price slowly moves closer without the price moving at all. You won't see that on any chart.
No Guaranteed Price
There's no guaranteed execution price here either. If the price jumps, the position can be closed below the calculated threshold. Together with maintenance margin, funding and closing fees, that explains why real liquidations almost always happen a little earlier, and often at worse prices, than the simple back of the envelope calculation suggests.
Summary
- Liquidation is based on the smoothed mark price, not the last price.
- Maintenance margin makes liquidation kick in a little earlier than the simple calculation says.
- With isolated margin only the assigned collateral is at stake, with cross margin your whole balance.
- Funding is often deducted directly from the position's collateral and moves the liquidation price closer, even without any price move.
Did you get it?
Why was I liquidated although the price never reached my liquidation price?
Because the exchange uses the mark price, not the last traded price on your platform.
Why was I liquidated before the calculated level?
Because maintenance margin and fees kick in first.
What's the difference between isolated and cross margin?
With isolated only the assigned collateral is at stake, with cross your whole balance.
Check your understanding
Your task
Your account holds $5,000, and you assign $500 as collateral to one position. Write down how much you can lose in the worst case with isolated margin and how much with cross margin. Then check your platform's help pages for which mode is the default and note whether you would have chosen it on purpose.
Related
- LiquidationStage 3
- LeverageStage 3
- Maker, taker, and fundingStage 2
- Leverage and liquidation simulatorCalculator
- Matching questions for this stageQuestions