1. What Is Liquidation (Margin Call)? When Does It Most Often Occur? Liquidation (also called "margin call") happens when an account's maintenance margin rate falls below the platform's requirement,1. What Is Liquidation (Margin Call)? When Does It Most Often Occur? Liquidation (also called "margin call") happens when an account's maintenance margin rate falls below the platform's requirement,

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What Is Liquidation? A Complete Guide to Its Mechanism, Price Calculation, and Risk Management

Oct 17, 2025MEXC

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1. What Is Liquidation (Margin Call)? When Does It Most Often Occur?

Liquidation (also called "margin call") happens when an account's maintenance margin rate falls below the platform's requirement, prompting the trading platform to forcibly close positions to prevent further losses.

In simple terms, when market prices fluctuate sharply and your account funds are insufficient to maintain your current positions, the system will automatically sell your long positions or buy back your short positions to protect platform funds and maintain market stability.

This situation is most common in cryptocurrency futures and leveraged trading, especially during high-volatility markets. For example, if asset prices suddenly drop (or spike against a short position) and your account balance falls below the required maintenance margin, the platform will automatically liquidate part or all of your positions according to preset rules to cover the margin gap.

Example: Suppose you buy Ether (ETH) with 10x leverage. If ETH price suddenly drops sharply, and your margin rate becomes insufficient, the system will automatically liquidate your position to prevent further losses.

To reduce the risk of unnecessary liquidations caused by low liquidity or price manipulation, MEXC uses a Fair Price mechanism. When calculating whether to trigger liquidation, the system references the fair price instead of extreme last-trade prices, effectively minimizing unnecessary liquidations.

*BTN-Trade ETH &BTNURL=https://www.mexc.com/futures/ETH_USDT *

2. How Is Liquidation Triggered?

In crypto Futures trading, the trigger conditions and calculations for liquidation depend on whether you use Isolated Margin or Cross Margin. Understanding these rules helps you evaluate risks and plan strategies in advance.

2.1 What Is Isolated Margin?

In Isolated Margin mode, each position's margin is calculated independently. Losses affect only that position and do not impact other positions or your overall account balance. This mode helps control risk for individual positions and is suitable for risk-averse traders or those managing multiple dispersed positions.

Isolated Margin Mode Pros and Cons:

Pros: Risk isolation, suitable for running multiple strategies simultaneously.
Cons: Lower margin utilization per position. No automatic redistribution of funds after liquidation.

2.1.1 Liquidation Price Calculation in Isolated Margin

Trigger condition: Position Margin + Unrealized PNL ≤ Maintenance Margin

Long position: Liquidation Price = (Maintenance Margin - Position Margin + Entry Price × Quantity × Size) / (Quantity × Size)

Short position: Liquidation Price = (Entry Price × Quantity × Size - Maintenance Margin + Position Margin) / (Quantity × Size)

Note: The formulas above do not include trading fees, so the actual liquidation price may vary slightly.

Example: You buy 1 ETH perpetual Futures contract at 4000 USDT with 10x leverage in isolated margin mode.

Initial position margin: 400 USDT (4000 / 10)
Maintenance margin rate: 0.5%
Maintenance margin: 4000 × 0.5% = 20 USDT

Liquidation Trigger Condition:

Liquidation occurs if: Position Margin + Unrealized PNL ≤ 20 USDT

If ETH drops to 3500 USDT, unrealized loss = (4000 − 3500) × 1 = 500 USDT

Total margin = 400 − 500 = −100 USDT < 20 USDT Liquidation triggers, and your 400 USDT margin is lost.

2.2 What Is Cross Margin?

In Cross Margin mode, all available account funds form a common margin pool for all positions. Losses from one position can be automatically covered by other positions' margins. This reduces the risk of single-position liquidation but may cause multiple positions to liquidate if the total margin is insufficient.

Cross Margin Mode Pros and Cons:

Pros:

Higher margin utilization: Pooled funds support multiple positions.

Avoids frequent liquidations: Losses in one position can draw from other positions to delay liquidation.

Cons:

Risk contagion: One position's loss can quickly consume account funds, triggering other liquidations.

Harder risk management: Individual position risks are less isolated.

2.2.1 Liquidation Price Calculation in Cross Margin

In Cross Margin mode, all of a user's available margin is used to support their positions. However, note that unrealized profitsfrom profitable positions cannot be used as margin for other positions.

Example:

Suppose an account has 1,000 USDT and holds both BTC and ETH long positions in cross margin mode. If ETH suddenly drops sharply and incurs large losses, the margin from the BTC position will be automatically used to cover the ETH losses. If the total margin is still insufficient, both positions may be liquidated simultaneously.

2.3 Risks and Strategy Recommendations

From the formulas and examples above, we can see:

Isolated Margin offers risk isolation, making it suitable for single strategies or low-volatility markets.
Cross Margin provides higher capital efficiency, but risks are interconnected across positions, making it suitable for traders with sufficient funds and diversified strategies.
In high-risk situations, you can manually increase position margin or reduce leverage to widen the gap between the liquidation price and the entry price, reducing the likelihood of forced liquidation.

Aspect	Isolated Margin	Cross Margin
Margin Calculation	Each position is calculated independently	All positions share margin
Risk Impact	Risk limited to a single position	Risks are linked across multiple positions
Suitable For	Risk-averse, single-strategy traders	Capital-efficient, diversified-strategy traders
Liquidation Risk	Only the position at risk is liquidated	Liquidation may affect all positions

3. Why Liquidation Is Essential

In high-leverage and high-volatility crypto derivatives markets, liquidation is a core risk management mechanism that protects both platform funds and market stability. It serves as an essential tool to prevent risk from spilling over from a single account and directly impacts traders' profits and losses. Understanding why liquidation is essential helps investors develop more robust position management and risk control strategies.

How Liquidation Protects the Market

Prevent uncontrolled losses: When margin is insufficient, the system automatically closes positions to prevent losses from exceeding the account's capacity, protecting both the trader and the platform.
Stabilize market order: Timely liquidation of high-risk positions reduces the chain reaction caused by individual account liquidations, mitigating systemic risk.
Enhance risk awareness: Liquidation rules encourage traders to continuously monitor leverage and margin levels, avoiding excessive risk-taking.

What Traders Should Consider

Missed rebound opportunities: After short-term extreme volatility, even if prices quickly recover, liquidated traders cannot participate in subsequent rebounds.
Exacerbated losses: In extreme market conditions, insufficient liquidity may cause slippage, resulting in losses exceeding expectations.
Impact on trading confidence: Frequent liquidations can disrupt trading plans, weakening execution and psychological stability.

While liquidation serves as a necessary market mechanism for platform stability, traders bear the cost when positions are forcibly closed. The key to successful trading lies in proactive risk management—controlling leverage and maintaining sufficient margin to avoid liquidation altogether.

4. Liquidation Trigger Logic and Handling Process

When liquidation is triggered, the system executes it in the following order: first the system cancels orders, then matching between long and short positions, followed by laddered liquidation, and finally resulting in bankruptcy takeover. This approach allows positions to be gradually liquidated according to the user's risk limits, preventing all positions from being liquidated at once and controlling user risk.

4.1 Cancel Orders: In Cross Margin mode, all current open orders in the account will be canceled. In Isolated Margin mode, if auto-margin addition is enabled, all open orders for the current Futures will be canceled. After canceling orders, if the maintenance margin rate is still ≥ 100%, the system proceeds to the next step.

4.2 Self-Matching Between Long and Short Positions: For Cross Margin accounts with both long and short positions, the system will reduce positions by matching longs and shorts internally. After this step, if the maintenance margin rate remains ≥ 100%, the system moves to the next step.

4.3 Laddered Liquidation: If the user's position is already at the lowest risk tier, the system moves directly to the next step. If the position's risk tier is higher than the lowest, a step-down process is applied: part of the position in the current tier is taken over by the liquidation engine at the bankruptcy price, lowering the risk tier. The margin rate is then recalculated using the new maintenance margin rate. If the liquidation conditions are still met, the process repeats until the position reaches the lowest tier.

4.4 Bankruptcy Takeover: When the position is at the lowest tier but the margin rate is still ≥ 100%, the remaining position is taken over by the liquidation engine at the bankruptcy price. Note: This takeover bypasses the matching system, so the bankruptcy price will not appear in the order book or on candlestick charts.

5. What Happens After Liquidation Engine Takes Over

When a user's position is taken over by the liquidation engine at the bankruptcy price: If the position can be executed on the market at a price better than the bankruptcy price, the remaining margin will be added to the insurance fund. If the position cannot be executed above the bankruptcy price, any deficit (negative balance) will be covered by the insurance fund.

If the insurance fund is insufficient to cover the deficit, the remaining portion of the liquidated position will be taken over by the automatic position reduction system.

6. How to Avoid Liquidation

6.1 Add Margin or Reduce Leverage

You can reduce the risk of liquidation by adding more margin to your position or lowering your opening leverage, which moves the liquidation price further away from the current market price.

6.2 Set Stop-Loss Orders

Setting a stop-loss price is an effective way to prevent liquidation. It helps limit potential losses and protects your orders from being forcibly closed.

Note: Stop-loss or take-profit orders may fail to execute due to rapid market fluctuations or insufficient position volume available for closing. If triggered successfully, the order will be filled at the market price, which may differ from the set price due to market volatility.

6.3 Enable Liquidation Alert Notifications

In the Futures trading preferences, you can turn on liquidation alerts and set a margin rate threshold. The MEXC platform will notify you when a position's margin rate reaches or exceeds your set value, with a maximum of one alert per position every 30 minutes.

7. Conclusion

Liquidation is a key risk control mechanism in cryptocurrency futures trading, directly affecting investors' capital security and trading outcomes. A thorough understanding of the differences between Isolated Margin and Cross Margin, as well as the calculation methods for liquidation triggers, can help traders allocate margin wisely, adjust leverage strategically, and effectively reduce the risk of liquidation.

During periods of high market volatility, actively using stop-loss strategies, promptly adding margin, and enabling liquidation alert notifications are essential tools for protecting your funds. Choosing a position mode that matches your risk tolerance and combining it with comprehensive risk management strategies allows you to operate steadily in a volatile market and maximize potential returns.

Therefore, when engaging in Futures trading, it is recommended to manage risk first, then pursue profit, supported by careful market analysis and scientific risk management, to safeguard your funds and achieve long-term, stable investment returns.

*BTN-Trade Futures&BTNURL=https://www.mexc.com/futures/BTC_USDT *

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