How Liquidation Works on Binance Futures
On the Binance Futures platform, traders can use leverage to increase the volume of their trades, allowing them to amplify potential profits on successful trading operations. However, using leverage also increases risks, including the possibility of position liquidation in the event of unfavorable market movements. In this article, we will look at the basics of the liquidation process on Binance Futures, explain how it happens, and point out ways to calculate the liquidation price to prevent losses.
Please note: The content of this article is intended for informational purposes only and should not be taken as investment advice or a recommendation for action.
The team of specialists prepares the material at the trading terminal Cryptorobotics.
What is liquidation on Binance?
Liquidation on Binance refers to the process where the exchange automatically closes a user’s losing position when they cannot maintain a sufficient margin level. Mainly, this occurs when the value of a trader’s position falls to a critical level, and there are insufficient funds to support the margin requirement. In such cases, the exchange decides to close the position.
On the Binance futures exchange, traders are not required to cover the full value of the contract. They can deposit only a part of the value as collateral or a guarantee. If the trade does not go as the trader expects, for example, if the price of an open long position falls, this collateral is used first. When it is fully depleted, liquidation occurs, where the exchange terminates the position, and the trader loses their collateral.
Consider an example: you have 100 USDT in your account, and you decide to open a long position with 1,000 USDT using 10x leverage. This means that 900 USDT will be added to the total value of the position in addition to your 100 USDT. If the value of the contract decreases by 10%, the total value of the position will drop to 900 USDT, and your invested 100 USDT will be lost, which is the process of liquidation.
It is important to understand that using leverage increases both the potential for profit and liquidation risks. For example, when trading with 100x leverage, the exchange may liquidate the position with just a 1% price decrease from the opening value, as this is the value of your collateral. Whereas with 10x leverage, a price drop of 10% would be required for liquidation.
How to Calculate the Liquidation Price on Binance Futures
Calculating the liquidation price on Binance Futures involves several key parameters such as the average position price, the number of coins (or contracts), the margin used, and the leverage employed. Here is how you can calculate the liquidation price for long and short positions:
For long positions:
Liquidation Price=Average Position Price×Number of Coins−(Margin×Leverage)Number of Coins−(Margin/Average Position Price)
Liquidation Price=
Number of Coins−(Margin/Average Position Price)
Average Position Price×Number of Coins−(Margin×Leverage)
For short positions:
Liquidation Price=Average Position Price×Number of Coins+(Margin×Leverage)Number of Coins+(Margin/Average Position Price)
Liquidation Price=
Number of Coins+(Margin/Average Position Price)
Average Position Price×Number of Coins+(Margin×Leverage)
Where:
- Average Position Price is the average price at which you entered your current position.
- The number of Coins is the amount of coins (or contracts) you are trading.
- Margin is the total amount of margin you have allocated for the given position.
- Leverage is the leverage you are using for the given position.
Example Calculation:
Suppose you open a long position on BTC/USDT worth $30,000 with a 10x leverage. This means your margin is 10% of the total position value, or $3,000. If the position’s value drops by 10%, your position will be nearing liquidation. For an accurate calculation, specific values are required, but the main idea is that using a 10x leverage, a 10% decrease in position value from the initial price can lead to liquidation.
Binance Futures provides traders with tools for risk monitoring and management, including PNL (Profit and Loss) and a built-in liquidation calculator, allowing for easy assessment of the potential liquidation price for any trading position.
Liquidation Fees on Binance
During the liquidation process of positions on Binance Futures, the exchange charges traders a fee ranging between 1% and 1.5%. This percentage is determined by the type of futures contract being traded. The fee is deducted directly from the trader’s futures account based on the amount placed as a margin.
For example, if a trader invested 100 USDT from their own funds to open a position using 100x leverage, and the trade goes unfavorably leading to the exchange having to close the position, a fee of 1.5% is charged. This means that 1.5 USDT will be held from the trader’s futures account, which represents 1.5% of the initially invested 100 USDT.
How to Protect Yourself from Liquidation on Binance Futures
To avoid liquidation on Binance Futures, it’s important to understand that the platform does not provide warnings about unfavorable price movements until the moment of liquidation itself. Therefore, when a position is liquidated, it disappears from the “Positions” section, and the invested funds are not returned to the trader.
The main method of preventing liquidation is active monitoring of futures prices and paying attention to the PNL (Profit and Loss) indicator. In case of a noticeable decrease in value, there is an option to manually close the position, which allows for minimizing losses and preserving a portion of the invested funds.
To automate the process of exiting a position, it is recommended to use Stop-Loss orders, placing them slightly below the entry-level but above the potential liquidation price. If liquidation can occur with a 10% drop, then a Stop-Loss can be set at a loss level of 5% or 3% to prevent complete liquidation.
The choice of margin type also plays a key role in the strategy to protect against liquidation. Using an isolated margin provides greater security, as in the case of failure, losses are limited only to the funds allocated for that particular position. When using cross-margin, there is a risk of losing additional funds from the futures account.
Considering the high volatility of the cryptocurrency market, where prices can fluctuate by 5-10% within a single day, beginners are advised to avoid using high leverage (10x and above), as positions with higher leverage are more often at risk of liquidation during sharp market movements.
