How does the liquidation process work?

Margin trading is a strategy that allows traders and investors to increase their positions in financial markets using leveraged funds. It is becoming increasingly popular due to its ability to increase profit potential and expand investment opportunities. However, it is also associated with increased risks, including the possibility of losing all invested capital. Even small market fluctuations can lead to significant losses that can exceed the initial deposit. One such risk is liquidation, the process of which we will explore in this article.

More detailed information about margin trading on our exchange can be found in the corresponding section of our Help Center.

What is liquidation and how does it work?

Liquidation is the process by which an exchange forcibly closes a trader's position if his margin funds are insufficient to maintain an open position. In margin trading, traders use borrowed funds to increase the volume of positions, which increases both the potential profits and the risks of liquidation. This can happen if the price of an asset moves against a position, especially when leverage is used. For example, at x2 leverage the risk remains relatively moderate, whereas at x10 leverage it becomes much higher. Liquidation protects the exchange from outstanding losses, but for the trader it can result in a total or partial loss of funds.

In margin trading, such changes can quickly lead to a shortage of funds to maintain a position. With sharp fluctuations in cryptocurrency prices, the liquidation process can accelerate. When losses exceed a certain threshold, the exchange automatically closes the position to avoid further losses. This results in the loss of all invested funds, as the trader's assets no longer cover his debt to the exchange.

The liquidation process on WhiteBIT can be partial. If the level of equity in a position falls below the liquidation threshold, the exchange will automatically start closing positions one by one — from the smallest to the largest Initial margin. This happens as follows:

First, margin positions are liquidated (liquidation is done in order depending on the Initial margin value for each position.).
Then, if necessary, crypto borrowings are liquidated.
Futures positions are liquidated last.

Initial margin is the amount of money that a trader must deposit to open a leveraged position. For example, if you have 500 USDT on your balance and you open a position with leverage of 5x, this 500 USDT will act as your initial margin.

For more information on the different types of liquidation and their impact on the market, please see the article on our WhiteBIT blog at this link.

How to avoid liquidation?

The first signal about the risk of liquidation of your position will be Margin Call.

Margin Call is a system notification sent to the trader when the level of free funds in the position decreases to the minimum allowable value.

This happens in case of significant losses in a position that require additional collateral to maintain it.

When a Margin Call occurs, the trader has several options for action:

Deposit to the margin account. Depositing additional funds will increase the level of collateral and prevent liquidation of the position.
Close the unprofitable position. This will help avoid further losses and free up funds for other trades.

Margin Call is usually triggered when the collateral level of a position is reduced to a certain minimum percentage of the trader's own funds.

For example, if the equity level of the position drops to 25% (excluding borrowed funds), the system will send a Margin Call notification. After that, the trader needs to take action to maintain the position. If the trader does not take action to replenish the account or close the position after receiving the Margin Call, there is a risk of starting the liquidation process.

What is auto-cancellation of orders?

The WhiteBIT platform has a mechanism designed to prevent liquidation from occurring — Auto-cancellation of orders. This tool automatically cancels open orders before liquidation if a trader receives a Margin Call. The released funds are used to maintain the unprofitable position, which allows to postpone a possible liquidation.

Let's look at an example of how this mechanism works:

Say you have a losing position on the BTC/USDT pair and several limit orders on other markets, for example, Buy orders on ETH/USDT. When the system records a Margin Call on your losing position, the limit orders on ETH/USDT are automatically canceled. This frees up the funds that were reserved for these orders and allocates them to increase the collateral for the losing position.

Thus, the WhiteBIT exchange has implemented mechanisms that help traders minimize losses when trading with leverage. Instead of complete liquidation of all positions at the onset of liquidation, a gradual liquidation approach is used, where only parts of positions are closed.

In addition, the auto-cancel mechanism helps to preserve trader's funds by freeing up funds blocked in unexecuted orders to support unprofitable positions.

It is important to realize that both of these mechanisms are aimed at protecting traders from significant losses that may exceed their investments. These measures also contribute to the financial stability of the exchange and prevent additional losses for all market participants.

Support

In case of any questions related to the functionality of our exchange, you can:

Leave a request on our website;
Write to the support email: support@whitebit.com;
Write to the chat using the button in the lower right corner of the screen (in the upper right corner of the WhiteBIT app, click ).

How does the liquidation process work?

What is liquidation and how does it work?

How to avoid liquidation?

What is auto-cancellation of orders?

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Support

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