Liquidation is when your platform automatically closes your leveraged positions because your account no longer has enough margin to support them. It isn’t a fee or a penalty. It’s the platform closing the trade before the loss grows past what your account can cover. Positions are closed with a market order, and because liquidations usually happen when prices are moving quickly against you, the fill can be worse than the last price you saw.
The most reliable way to avoid it is to use less leverage than you’re permitted. Below, we cover what triggers a liquidation, how much room each leverage level gives you, and six ways to widen your margin for error.
What triggers a liquidation?
Two numbers matter. The first is the maintenance margin: the minimum amount of margin your platform requires to keep your positions open. The second is your margin ratio, which shows how close your account’s equity is to that minimum.
Liquidation is generally based on the risk of your whole account, not one position at a time. The platform looks at your overall leverage, your total exposure, and how your positions add up together. As losses eat into your equity, including losses on trades you haven’t closed yet, your margin ratio moves toward the minimum. When it gets there, the platform starts closing positions.
That can happen in stages. Some platforms close just enough to bring your account back above the minimum, which leaves you with smaller positions. Others close everything at once. It’s worth checking which approach your platform uses before you’re anywhere near the line.
How much room does your leverage give you?
Leverage decides how far the price can move against you before your margin is gone. The rough rule is simple math: divide 100% by your leverage. At 2x, about half the position’s value is your own money, so it takes roughly a 50% move against you to erase it. At 20x, only about 5% is yours, so a 5% move does the same damage.
Leverage | Approximate move against you that erases your margin |
|---|---|
| 2x | 50% |
| 3x | 33% |
| 5x | 20% |
| 6x | 17% |
| 10x | 10% |
| 20x | 5% |
This is the best case, and it assumes a single position backed only by its own margin. In practice, liquidation comes sooner. The maintenance margin means positions get closed before your margin hits zero, and fees and funding payments can chip away at the buffer over time. Your other positions matter too, because liquidation looks at your whole account.
So leverage doesn’t just multiply your returns. It shrinks your room to be wrong by the same factor. A trader at 20x has a tenth of the buffer of a trader at 2x.
Six ways to avoid liquidation
No single setting removes the risk. Used together, these give you more room for error.
Use less leverage
Halving your leverage roughly doubles the move it takes to liquidate you. Nothing else on this list widens your buffer as directly. The maximum leverage a platform allows is a limit, not a recommendation.
Set a stop-loss
A stop-loss is an exit you choose, at a price you set. A liquidation is an exit the platform chooses for you, often with a fee on top. Placing a stop-loss before your liquidation price lets you leave the trade on your own terms, before the platform steps in. It’s easiest to set one when you open the trade, not once the price is already moving against you.
Keep extra margin in your account
Margin above the minimum buys you time. The more you hold above the maintenance margin, the further the price has to move before liquidation, and the more time you have to react to a sudden swing. Margin you aren’t using isn’t wasted. It’s your buffer.
Size positions by what you can afford to lose
Start with how much of your account you’re willing to lose on a trade, then work out the position size from there. Doing it the other way around, sizing by how good the trade looks, is how one bad call can take out an entire account.
Don’t count on related positions to protect each other
A common approach is to go long on one asset and short a related one. But related assets tend to move together, and that tendency usually gets stronger in a sell-off, which is exactly when you need the protection. Two positions that move together are really one position. Real diversification means holding positions that behave differently when markets are under stress, and that’s harder to find than it looks.
Watch your funding costs
Funding is the recurring payment between long and short traders that keeps a perp’s price close to the asset’s market price. If you’re on the paying side, each payment comes out of your equity. Over a long hold, funding alone can push your account toward the maintenance margin, even if the price hasn’t moved against you. If you plan to hold for more than a few days, factor it into your position size.
What happens if a liquidation can’t be filled?
Sometimes the market moves too fast, or there isn’t enough trading activity, to close a position at a price that covers the loss. When that happens, some platforms use auto-deleveraging (ADL). ADL closes part of the positions on the other side of the trade to cover the shortfall, usually starting with the traders who have the biggest profits and the most leverage.
That means part of a winning position can be closed early, during a violent move, to cover someone else’s liquidation. It’s rare, but it’s worth knowing about. In extreme volatility, a good trade can end early through no fault of your own.
What Canadian traders should know
Currency moves can change your buffer
Most perps are priced and margined in U.S. dollars. If your margin is in USD, a change in the exchange rate won’t move your liquidation price, but it will change what your margin is worth in Canadian dollars. If your margin is in Canadian dollars and your position is priced in USD, an exchange rate move can shrink your buffer even when the asset’s price hasn’t moved.
How liquidation losses are taxed
A liquidation is a realized loss, and how it’s treated at tax time depends on how you trade. Frequent, active trading tends to be treated as business income, while occasional trading may be treated as capital gains or losses. The difference matters, because business losses can generally be deducted against other income, while capital losses can only offset capital gains. The Canada Revenue Agency (CRA) decides based on the facts of each case, so it’s worth checking with a tax professional.
The market doesn’t keep Canadian hours
Perpetual futures trade 24/7, and some of the biggest moves happen while you’re asleep. There’s no closing bell to pause things. A position that looked comfortable at midnight can be liquidated by morning. If you can’t watch your positions around the clock, that’s a strong argument for lower leverage and a stop-loss that’s already in place.
