Liquidation is a process when a position is forcibly closed when the asset price is reaching a certain limit.
When opening a leveraged trading position, its liquidation price is automatically determined. If the cryptocurrency price crosses this mark, the position is automatically liquidated.
The liquidation price depends on the order's parameters, the leverage and the remaining balance in the trader's account. There's no need to calculate the price manually. Changelly PRO will provide you with the liquidation price, when you set the order's parameters.
For liquidations, a Liquidation Fee in the amount of 0.5% of the position’s value is charged in the quote currency (i.e. ETH on the BTC/ETH pair).
To calculate the risk level of a margin account and the possibility of a position's liquidation Changelly PRO uses a ratio called Effective Leverage. The value is calculated as follows:
Effective Leverage = (Index Price * Position Size)/(Position Margin + Unrealized PnL)
where the Index Price is the price at which you want to buy/sell the assets. The Position Size is the order amount in the base currency. The Position Margin is the collateral amount available for that order. The Unrealized PnL is the current PnL of the position that has not yet been realized.
Example
The Trading Pair is BTC/ETH
Index Price = 26.8 ETH
Position Size = 2 BTC (or 53.6 ETH)
Position Margin = 11.4 ETH
Unrealized PnL = 2 ETH
Effective Leverage = (26.8 * 2)/(11.4 + 2) = 4
Effective Leverage in use
10x Leverage pairs
● If the Effective Leverage is below 10, a trader can decrease or increase the Position Size and/or the Position Margin as they wish while the effective leverage remains below 10.
● If the Effective Leverage is equal to or greater than 10, then a trader can only decrease the Position Size and/or increase the Position Margin.
● If the Effective Leverage is equal to or greater than 12, a trader will receive a Margin Call. The call means that the position is highly leveraged and there's a high risk of liquidation.
● Finally, if the Effective Leverage reaches 20, the position will be automatically liquidated.
5x Leverage pairs
● If the Effective Leverage is below 5, a trader can decrease or increase the Position Size and/or the Position Margin as they wish while the effective leverage remains below 5.
● If the Effective Leverage is equal to or greater than 5, then a trader can only decrease the Position Size and/or increase the Position Margin.
● If the Effective Leverage is equal to or greater than 7, a trader will receive a Margin Call. The call means that the position is highly leveraged and there's a high risk of liquidation.
● Finally, if the Effective Leverage reaches 10, the position will be automatically liquidated.
Once the position reaches the liquidation price, the process is as follows:
1. The system will cancel all of the open orders for a highly leveraged position.
2. If after (1) above the Position Margin is still insufficient to reach the required minimum, the system will attempt to close the position with a single Limit Order with Time-In-Force instruction "Fill-Or-Kill." If it succeeds, the trader may get a better price than the Bankruptcy Price.
3. If after (2) above the position is still not liquidated, it will be sold at Bankruptcy Price.