Partial Liquidation


What is liquidation and why does it happen?


Liquidation is a mechanism designed to protect traders from incurring losses that exceed their margin balance and potentially leading to bankruptcy (negative margin balance). To ensure this, the system establishes a minimum margin requirement for each type of contract, known as the maintenance margin. When a trader's margin balance reaches or falls below the maintenance margin requirement, the system initiates the liquidation process.



What is partial liquidation?


Partial liquidation refers to the process where only a portion of a trader's position is closed or reduced to meet the maintenance margin requirements, instead of completely liquidating the entire position. This helps to minimize potential losses and protect the trader's margin balance from turning negative, while still maintaining a portion of their original position in the market.


What is forced market buy/sell and why does it happen?


Forced market buy/sell refers to a situation in which the trading system automatically executes a buy/sell market order on behalf of the trader, to convert the unrealized profits from other positions into realized gains. This typically occurs in scenarios where the trader's position is at risk of liquidation due to insufficient margin or when maintenance margin requirements are not met. The purpose of a forced market buy/sell is to mitigate potential losses, protect the trader's remaining margin balance, and maintain the stability of the trading platform.


What will happen when liquidation or partial liquidation occurs?


- Upon liquidation, the system assumes control of your position and the remaining margin balance, aiming to close the position (or part of it) at the bankruptcy price.


- If the position cannot be closed at the bankruptcy price, the system seeks additional margin from BTSE's insurance fund to adjust the price further up or down, increasing the likelihood of successfully closing the position.


- Should the position remain unclosed after these adjustments, the system initiates the auto-deleveraging (ADL) process. This involves systematically matching the liquidated position with opposite positions to close it off. Both sides' position sizes continue to decrease until the liquidated position is entirely closed. The priority for auto-deleveraging by the liquidation engine is determined by the profit and leverage levels of the counterparty position.

 


How does the system determine when to initiate the liquidation or partial liquidation process?


Upon entering a position, the system calculates a liquidation price for your reference. If the Mark Price crosses your liquidation price, it indicates that your margin balance is insufficient to meet the maintenance margin requirement. At this point, the system automatically triggers either the liquidation or partial liquidation process, depending on the circumstances.


Mark Price: A relatively fair price derived from multiple price sources. To prevent market manipulation and potential liquidation of a significant number of users, BTSE uses the Mark Price as the basis for initiating the liquidation or partial liquidation process.


How can you prevent liquidation and avoid losing more than anticipated?


To minimize the risk of liquidation or losses beyond your expectations, consider implementing the following strategies:


1. Monitor maintenance margin requirements and select a suitable leverage ratio.


For instance, BTC contracts necessitate a 0.5% maintenance margin of the notional value, while LTC contracts require 1.5%. If you frequently trade with maximum leverage, be aware that different contract currencies may have varying maintenance margin requirements. Choose an appropriate leverage ratio to prevent unintended liquidation.


 


2. Track your liquidation price and replenish your margin balance as needed.


When the Mark Price approaches your liquidation price, add funds to your margin balance to prevent the liquidation price from reaching the Mark Price. You can achieve this by depositing more collateral into your futures wallet.


3. Set a stop-loss point and close your position before liquidation occurs.


Establish a Stop Order in advance. If the market price trend deviates from your expectations, the system can trigger the stop order based on your predetermined trigger price.


4. Allocate funds according to the level of risk you are willing to accept.


In addition to the above strategies, manage your margin balance to avoid unexpected losses.


For example:

Suppose you earn a profit of 1,000 USDT but are only willing to risk 500 USDT. You can transfer 500 USDT back to your spot wallet to prevent unanticipated losses caused by the system automatically refilling your margin.


How is the initial margin calculated?

Initial Margin = Notional Value x Initial Margin%

Notional Value = Mark Price x Position Size x Contract Multiplier


For example, when you buy long contracts of BTC with the following conditions:

- Market Price: 9000 USDT

- Mark Price: 9001 USDT

- Position Size: 100 (contracts)

- Contract Multiplier: 0.001

- Initial Margin: 1%

According to the contract specifications, the initial margin requirement for BTC futures contracts is 1%, and the contract multiplier is 0.001.

Hence the initial margin of this position will be: 9001 x 100 x 0.001 x 1% = 9.001 USDT


How is the maintenance margin calculated?


Maintenance Margin = Notional Value x Maintenance Margin%

Notional Value = Mark Price x Position Size x Contract Multiplier


For example, when you buy long contracts of BTC with the following conditions:

- Market Price: 8830 USDT

- Mark Price: 8800 USDT

- Position Size: 100 (contracts)

- Contract Multiplier: 0.001

- Maintenance Margin: 0.5%


According to the contract specifications, the maintenance margin requirement for BTC futures contracts is 0.5%, and the contract multiplier is 0.001.

Hence the maintenance margin of this position will be: 8800 x 100 x 0.001 x 0.5% = 4.4 USDT


How to calculate the approximate liquidation price?


Liquidation Price = Entry Price - Affordable Loss Per Coin

# Affordable Loss Per Coin = Affordable Loss / (Position Size * Multiplier)

# Affordable Loss = Available Margin Balance + unrealized PnL - Maintenance Margin - 2 Taker Fees - Funding Fee

# Long Position Unrealized PnL= (Mark Price - Entry Price ) * Position Size * Multiplier

# Short Position Unrealized PnL= (Entry Price - Mark Price ) * Position Size * Multiplier

# Maintenance Margin = Maintenance Margin% * Notional Value

# Taker Fees = Taker Fees% * Notional Value

# Founding Fees = Founding Fees% * Notional Value

# Notional Value = Mark Price * Position Size * Multiplier

Note: Both the entry and settle positions will be charged trading fees. To simplify the calculation, assume both fees are charged by the taker fee %

For example, you have a BTC Perpetual Long Position as below:

- Position Size: 1,000 contracts

- Contract Multiplier: 0.001

- Entry Price: 9,000 USDT

- Mark Price: 8,999 USDT

- Maintenance Margin %: 0.5%

- Taker Fee %:  0.06 %

- Funding Fee %: 0.0013 %

- Available Wallet Balance: 300 USDT

Step 1. Affordable Loss = Available Margin Balance + unrealized PnL - Maintenance Margin - 2 Taker Fees - Funding Fee

300 + ((8,999 - 9,000) * 1000 * 0.001) - (8,999 * 1000 * 0.001 * 0.5%) - (9,000 * 2 * 1,000 * 0.001 * 0.06%) - (8,999 * 1,000 * 0.001 * 0.0013%) = 243.09 USDT

Step 2. Affordable Loss Per Coin = Affordable Loss / (Position Size * Multiplier)

242.09 / (1,000 * 0.001) = 243.09

Step 3. Approximate Liquidation Price = Entry Price - Affordable Loss Per Coin

9,000 - 243.09 = 8756.91

 

When the Mark Price is equal to or lower than 8756.91, the position will get liquidated.


Risk comparison under different leverage ratios


- When you choose 100x leverage (or Cross Mode) and provide only a 1% margin balance, you will have a margin of error of less than 0.5%


Maintenance
 Margin%

Margin of Error
 (100x)

0.5%

0.5%


- When you choose 1x leverage and provide 100% margin balance, you will have a margin of error of around 99.5%
 

Maintenance
 Margin%

Margin of Error
(1x)

0.5%

99.5%

* The examples here are approximations without accounting for trading fees and funding fees.


Compared to high leverage, low leverage will significantly increase the risk-taking ability of the position and reduce the risk of liquidation.

Users are advised to carefully evaluate his/her risk-taking ability and choose a suitable leverage ratio.




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