About Liquidation Price – Monochrome

Liquidation occurs when a position’s mark price reaches the liquidation price, triggering closure at the bankruptcy price (the price level where margin falls to 0%). This happens when the position’s remaining margin falls below the maintenance margin requirement—meaning the trader’s margin is insufficient to cover potential losses. In this instance, the position must be liquidated.

Example: If the liquidation price is 15,000 USDT and the current mark price is 20,000 USDT, once the mark price drops to 15,000 USDT, the position’s unrealized loss reaches the maintenance margin level, triggering liquidation.

Liquidation Essentials

Liquidation based on mark price: Monochrome uses the mark price to avoid unnecessary liquidations caused by low liquidity or market manipulation.
Risk limits increase with position size: Larger positions require higher margin levels. Large positions may face liquidation risks that could impact the market. Monochrome’s liquidation engine can allocate additional margin to safely close large positions.
If liquidation is triggered, Monochrome cancels all pending orders for that futures position to free margin and maintain the position. Orders on other futures positions are unaffected.
Monochrome gradually liquidates positions to reduce maintenance margin requirements and avoid full liquidation when possible.
In cross margin mode, all available margins are used for the position. Losses from one position do not count as margin for other cross-margin positions.

Liquidation Price Calculation

(A) Isolated Margin Mode In isolated margin mode, each position has its own margin independent of the account balance. This allows traders to better control account risk, as the maximum loss in the event of liquidation is limited to the position margin.

Formulas:

Long (Buy) Position: Liquidation Price = (Avg. Entry Price × Quantity × Contract Size + Maintenance Margin – Initial Margin) ÷ (Quantity × Contract Size)

(*Round up to the nearest integer)

Short (Sell) Position: Liquidation Price = (Avg. Entry Price × Quantity × Contract Size – Maintenance Margin + Initial Margin) ÷ (Quantity × Contract Size)

(*Round down to the nearest integer)

Notes:

Position Value = Contract Quantity × Avg. Entry Price
Initial Margin (IM) = Position / Leverage
Maintenance Margin (MM) = (Position Value × MMR) – Maintenance Margin Deduction

Example 1 – Long position: Trader A opens a 1 BTC long position at 20,000 USDT with 50× leverage. Maintenance margin rate = 0.5%

Initial Margin = 1 × 20,000 ÷ 50 = 400 USDT
Maintenance Margin = 1 × 20,000 × 0.5% = 100 USDT
Liquidation Price = (20,000 × 1 + 100 – 400) ÷ 1 = 19,700 USDT

Example 2 – Long position with funding fee deducted from Initial Margin: If Trader A in Example 1 incurs a 200 USDT funding fee that cannot be covered by available balance, the fee is deducted from the initial margin. Reduced margin increases the liquidation price until it is closer to the mark price, making liquidation easier.

Due to the reduced initial margin, the Liquidation Price is calculated as follows:

Initial Margin = 1 × 20,000 USDT / 50 = 400 USDT

Maintenance Margin Rate = 0.5%

Maintenance Margin = 1 × 20,000 × 0.5% = 100 USDT

Liquidation Price = (20,000 × 1 + 100 – 400) – 200 ÷ 1 = 19,900 USDT

(B) Cross Margin Mode In cross margin mode, the liquidation price may change continuously as available margin is affected by other positions. Each position’s initial margin is independent, but the remaining balance is shared among all positions. The available balance will be impacted by the unrealized profits and losses of all existing positions. Liquidation occurs only when available margin reaches 0 and the maintenance margin is insufficient to sustain the position.

Example – Long position, excluding fees: In cross margin mode, Trader A opens a 2 BTC long position at 10,000 USDT with 100× leverage. Available balance = 2,000 USDT

Maintenance Margin = 2 × 10,000 × 0.5% = 100 USDT

To calculate the liquidation price, we first determine the maximum loss covered:

Maximum Loss Covered = Available Balance - Maintenance Margin

= 2,000 - 100 = 1,900 USDT

Given a maximum loss coverage of 1,900 USDT, the liquidation price for the long position [UP] is calculated as:

Liquidation Price = (Avg. Entry Price × Quantity × Contract Size + Maintenance Margin - Initial Margin) / (Quantity × Contract Size) = (10,000 × 2 + 100 – 200) ÷ 2 = 9,950 USDT

(*Round up to the nearest integer)

Trader A accepts this risk level and opens the position. The system will reserve 200 USDT from the available balance as initial margin for the position:

Initial Margin = (Position Quantity × Entry Price) / Leverage = 2 × 10,000 ÷ 100 = 200 USDT

Available Balance = 1,800 USDT

Is Any Margin Returned After Liquidation?

Loss > Margin: If the trader’s loss exceeds the margin allocated to the position, the entire margin will be lost, and the trader will no longer hold the position.
Loss < Margin: If the trader’s loss is smaller than the margin, the position will be closed, and the remaining margin will be returned to the trader’s account.

Important Notes:

Liquidation is irreversible. Traders cannot control timing or execution price. This may result in additional losses, particularly during periods of high market volatility.
Before engaging in cryptocurrency trading, traders should fully understand the mechanics, triggers, and potential risks of liquidation. Proper risk management, stop-loss orders, and timely margin deposits can minimize liquidation impact and protect their capital.