Liquidation is the forced closing of a leveraged position when the account no longer has enough margin to support it. It is the mechanism that prevents a losing perp position from creating more losses than the collateral can cover.
In spot trading, a token can fall sharply and you still hold the token. In perps, a large enough move against your position can close it automatically.
Why liquidation exists
Perp venues let traders use leverage. That means a trader can control a position larger than their collateral. If the market moves too far against the trader, the venue must close the position before losses exceed the margin available.
Mark price matters
Liquidation is usually based on a mark price rather than the last traded price. The last price can be noisy, especially in thin or fast markets. Mark price is designed to represent a fairer reference price for margin calculations.
This means your position can be near liquidation even if a recent trade printed somewhere else. Always watch the liquidation price and margin health, not just the latest candle.
A simplified example
Suppose you open a 10x long. A move of roughly 10% against the position could wipe out the collateral before fees and maintenance margin. In practice, liquidation usually happens before that full move because the system requires maintenance margin and charges closing costs.
The higher your leverage, the closer the liquidation price sits to your entry.
How to reduce liquidation risk
- Use lower leverage so normal volatility has room to move.
- Keep extra collateral instead of running at the maximum position size.
- Set a stop or manual exit before the liquidation price.
- Avoid holding oversized positions through major news or illiquid periods.
Liquidation is not just another exit. It is usually the worst exit because it happens after your margin buffer is gone.
Risk note: Liquidations can happen quickly in volatile markets and may include fees. This article is educational content, not financial advice.