Maintenance margin is the minimum margin required to keep your account from being liquidated. A position will be liquidated when the position margin balance (including unrealized PNL - the floating PNL calculated using the mark price as the exit price) falls below the maintenance margin. The mark price at which the liquidation is triggered is the liquidation price.
The maintenance margin level is fixed under one contract, while the initial margin (the minimum margin required to open a position) is affected by leverage. The higher the leverage, the less the initial margin, the closer to the maintenance margin, and the easier to be liquidated. On the other hand, the higher the leverage, the more the return %. Risk and return are directly proportional.
There are 5 prices involved in the liquidation process:
- Entry Price: The average price to open a position.
Liquidation Price: The position will be liquidated when the mark price reaches the liquidation price, and the margin balance (including unrealized PNL) falls to maintenance margin.
Mark Price
Bankruptcy Price: Liquidation order is executed at the bankruptcy price. That is, if the position is closed at this price, the loss of exiting the position is equal to the margin.
Liquidation Fill Price: The actual average fill price of liquidation.
When liquidation is triggered, the system will rely on the market, insurance funds， and ADL in turn to complete liquidation.
How to avoid forced liquidation
Users can avoid the risk of forced liquidation by adding margin, reducing the actual leverage or closing the position manually.
Add margin: As the margin increases, the forced liquidation price will also change. The more margin, the lower the risk of forced liquidation of the position.
Reduce the actual leverage: When the leverage multiple is lowered, the margin required for holding the position will increase. When the system detects enough balance in the account to add, the position leverage can be adjusted successfully.
Closing the position in advance: When the position is about to be in a risky state, the market price is fully closed in advance, which can quickly trade and avoid the risk of forced liquidation. It is also possible to partially close the position.
Insurance Funds
Insurance fund is the reserve fund to defend against the loss caused by forced liquidation orders that closed lower than the bankruptcy price. Insurance funds come from reserve funds provided by the platform and the surplus from forced liquidation orders.
Liquidation is to close the position at the bankruptcy price. If the actual fill price is better than the bankruptcy price, the remaining amount (i.e., the lesser loss) will be credited to the insurance funds. If the liquidation order is not executed by the time the mark price breaks bankruptcy price, the insurance funds will be activated.
You can view insurance fund balance, inflows and outflows on “Futures Info - Insurance Fund”.