Last updated on Aug 14, 2024
- All
- Financial Management
- Technical Analysis
Powered by AI and the LinkedIn community
1
What is leverage?
2
What is margin?
3
What is liquidation?
4
How to calculate liquidation price of a long position?
5
How to avoid liquidation?
6
What are the risks and benefits of leverage?
7
Here’s what else to consider
Be the first to add your personal experience
If you trade with leverage, you need to know how to calculate your liquidation price. This is the price at which your position will be automatically closed by the exchange if your margin falls below a certain level. In this article, you will learn the formula for calculating the liquidation price of a long position, which is when you buy an asset and hope that its price will rise.
Top experts in this article
Selected by the community from 8 contributions. Learn more
Earn a Community Top Voice badge
Add to collaborative articles to get recognized for your expertise on your profile. Learn more
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable…
5
1 What is leverage?
Leverage is a way of increasing your exposure to an asset by borrowing funds from the exchange or a broker. For example, if you have $1000 and use 10x leverage, you can open a position worth $10,000. This means that you can potentially amplify your profits, but also your losses. Leverage is expressed as a ratio, such as 2:1, 5:1, or 10:1.
Help others by sharing more (125 characters min.)
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
Leverage is the grace you get from a broker to have the enablement to trade big in the big financial market even with a small capital.Brokers offer from 1:10 to 1:1000 or more for some.The bigger the leverage, the lesser the down payment (margin) for any position opened.Leverage can be so helping if optimized nicely and it can be disastrous if abused.
LikeLike
Celebrate
Support
Love
Insightful
Funny
2
-
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
See AlsoValuing | BalancerCalculating the liquidation price is pivotal in managing risk for leveraged trading, preventing losses beyond a set threshold. The formula, Liquidation price=Entry price1+(Leverage×(1−Initial margin ratio))Liquidation price=1+(Leverage×(1−Initial margin ratio))Entry price, incorporates entry price, leverage, and initial margin ratio. This informs traders of the point at which their position will be automatically closed. For example, with an entry price of $100, 10x leverage, and 2% initial margin, the liquidation price is $8.06. This knowledge enables traders to make informed decisions on leverage use and risk management, a crucial aspect of successful trading.
LikeLike
Celebrate
Support
Love
Insightful
Funny
2 What is margin?
Margin is the amount of money that you need to deposit as collateral to open and maintain a leveraged position. It is usually a percentage of the total value of the position. For example, if you open a $10,000 position with 10x leverage, you need to have at least $1000 in your account as margin. Margin is also known as initial margin or maintenance margin.
Help others by sharing more (125 characters min.)
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
Margin is the minimum amount required to be in your trading account to open a position. With a small leverage, high margin is required.With a high leverage, small margin is required.Margin is meant to be considered as a trading thermometer, when it goes beyond a certain limit based on account, a trader gets margin call (liquidation alert) from the broker.
LikeLike
Celebrate
Support
Love
Insightful
Funny
2
3 What is liquidation?
Liquidation is the process of closing your position by the exchange or the broker if your margin falls below a certain level. This is done to prevent you from losing more money than you have in your account. Liquidation can occur due to price movements, fees, or interest charges. When your position is liquidated, you lose your entire margin and may incur additional fees.
Help others by sharing more (125 characters min.)
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
There is something referred to as margin level You get that by calculating equity/margin x 100That is your margin level.Whenever margin level is less than 100% (<100%) it is risky and unhealthy for trading position.That is referred to position thermometer.
LikeLike
Celebrate
Support
Love
Insightful
Funny
2
- Syed Hamza Hussnain Understand Science but discover the Art behind trading
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
There is also an insurance fee sometimes.This fee helps the exchanges / brokers to recover additional loss made during loquidation due to less loquidity in market.For example if your liquidation price is X, but when price reaches X, liquidity is not present there resulting in the position closure price being less than X in case of long position, the additional loss resulted due to this price deviation would effect the exchange/broker for which purposes the insurance fee is used.Other processes can also be used by exchanges to lessen their loss such as adjusting the liquidation price continously with respect to market volation present at that time.
LikeLike
Celebrate
Support
Love
Insightful
Funny
4 How to calculate liquidation price of a long position?
The formula for calculating the liquidation price of a long position is:
Liquidation price = Entry price / (1 + (Leverage x (1 - Margin ratio)))
Entry price is the price at which you opened the position. Leverage is the ratio of the position value to the margin. Margin ratio is the percentage of the position value that you need to have as margin.
For example, suppose you open a long position of $10,000 worth of Bitcoin at $50,000 with 10x leverage and a 1% margin ratio. The liquidation price of your position is:
Liquidation price = 50,000 / (1 + (10 x (1 - 0.01))) = 45,454.55
This means that if the price of Bitcoin drops below $45,454.55, your position will be liquidated and you will lose your $1000 margin.
Help others by sharing more (125 characters min.)
- Adam Cameron
(edited)
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
You sure the math in this formula is correct? I am not able to get $45,454.55 as the result using the numbers provided. The result i get is $4587.16. Help.
LikeLike
Celebrate
Support
Love
Insightful
Funny
5 How to avoid liquidation?
To avoid liquidation, you need to monitor your margin level and your position value. You can also use stop-loss orders, which are instructions to close your position at a certain price to limit your losses. Additionally, you can add more funds to your account or reduce your position size to increase your margin level and lower your liquidation price.
Help others by sharing more (125 characters min.)
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
There are many ways to avoid liquidation.1. Trade with proper risk management.2. Avoid over-leveraging of account.3. Use a reasonable stop loss level.4. Be ready to pump in more fund incase the of liquidation. So the account can carry the drawdown for the current time before the market will retrace/reverse in a trader's favour.
LikeLike
Celebrate
Support
Love
Insightful
Funny
3
6 What are the risks and benefits of leverage?
Leverage can be a powerful tool for traders who want to increase their returns and access more opportunities in the market. However, leverage also comes with significant risks, such as higher volatility, fees, and liquidation. Therefore, you should use leverage with caution and only trade with money that you can afford to lose. You should also have a clear trading plan and risk management strategy before using leverage.
Help others by sharing more (125 characters min.)
- Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM
- Report contribution
Thanks for letting us know! You'll no longer see this contribution
Leverage is like a sharpened double-edged sword in the hand of a samurai. Depending on how you use whichever side that faces you as a trader.Risks of leverage:1. It can make a trader lose faster if abused.2. It reduces the capital protection on equity.3. Leverage is easily abused and taken for granted in the bid of making huge profit from unfitting trading volume.Benefits of leverage.1. The lesser the leverage the higher the capital protection.2. Minimal leverage level enables higher market opportunities.3. It also creates room for the middle and lower class traders with skill sets to participate in an online trading business.Do not over leverage your account, successful traders do not make it in a night, leverage can not.
LikeLike
Celebrate
Support
Love
Insightful
Funny
5
7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
Help others by sharing more (125 characters min.)
Technical Analysis
Technical Analysis
+ Follow
Rate this article
We created this article with the help of AI. What do you think of it?
It’s great It’s not so great
Thanks for your feedback
Your feedback is private. Like or react to bring the conversation to your network.
Tell us more
Tell us why you didn’t like this article.
If you think something in this article goes against our Professional Community Policies, please let us know.
We appreciate you letting us know. Though we’re unable to respond directly, your feedback helps us improve this experience for everyone.
If you think this goes against our Professional Community Policies, please let us know.
More articles on Technical Analysis
No more previous content
- Technical challenges are hindering your progress. How do you navigate them with limited time for decisions? 3 contributions
- You're balancing qualitative and quantitative signals in technical trading. How do you decide which to trust? 4 contributions
- Your cross-functional team lacks technical analysis skills. How will you bridge the gap for project success? 3 contributions
- You're facing pushback from your team on new technical analysis methods. How can you get everyone on board? 1 contribution
No more next content
Explore Other Skills
- Payment Systems
- Economics
- Venture Capital
- Financial Technology
More relevant reading
- Technical Analysis What are the most effective ways to use trendlines in a liquidation strategy?
- Technical Analysis How can liquidation help you identify trading opportunities?
- Liquidation How do you factor in the time and uncertainty of liquidation in your analysis?
- Restructuring How do you estimate a company's asset recovery value?