How to execute a liquidation order: liquidation price and bankruptcy price

Binance Blog · 2023-02-01T08:00:21.000Z

Key points: When the margin balance falls below the maintenance margin, the position will be forced to be liquidated. The forced liquidation price refers to the price at which a trader's position triggers forced liquidation. The bankruptcy price is the price at which a trader loses an amount equal to the value of the collateral deposited or the initial margin amount. For forced liquidation orders, the liquidation price corresponds to the stop loss price, while the bankruptcy price is the limit price used when the order is executed. Forced liquidations are a common occurrence for traders of cryptocurrency contracts. Beginners who are not familiar with cryptocurrency derivatives may be confused by the idea of performing a liquidation of an open position. When placing a forced liquidation order on Binance Futures, both the liquidation price and the bankruptcy price are considered. They are two important price levels that traders should understand when trading perpetual contracts. This article explains the role of forced liquidation price and bankruptcy price on forced liquidation orders. Interpretation of the basics of forced liquidation When the margin balance is lower than the maintenance margin, forced liquidation will occur. Margin balance refers to the sum of wallet balance and unrealized profit and loss, while maintenance margin refers to the minimum amount of margin a trader must maintain to avoid closing a contract position. Binance futures perform forced liquidation at the mark price, which refers to the estimated true value of the contract. The mark price takes into account the fair value of the asset to prevent unnecessary liquidation during market fluctuations. The latest price refers to the latest price of the Binance futures contract. Forced Liquidation Price and Bankruptcy Price The forced liquidation price refers to the price at which a position triggers forced liquidation. This threshold is affected by multiple factors, including the leverage used, the maintenance margin rate, the current price of the cryptocurrency, and the trader’s account balance. The bankruptcy price is the price at which a trader loses an amount equal to the value of the collateral deposited or the initial margin. Starting from this price, the margin balance of users whose positions are forced to be liquidated will return to zero. How to force close an order? How to force close an order at these two prices is explained below. In practice, a liquidation order is similar to placing a limit order at the bankruptcy price. For a better explanation, we regard the steps of executing a liquidation order as executing a stop-profit and stop-loss order in two steps. For a stop-loss order, you select the stop price (last price or mark price) and the limit price at which the order will be executed. When your position reaches the stop price, the limit order is triggered and executed at the limit price.We think of a liquidation order as a stop-profit or stop-loss order with the trigger price as the mark price. Take profit and stop loss orders are triggered when your position reaches the mark price. For forced liquidation orders, the liquidation price is the stop loss price, and the bankruptcy price is the limit price used when the order is executed. Therefore, when the contract price is greater than the forced liquidation price, forced liquidation begins. The bankruptcy price is the limit price used when the user's margin amount is liquidated. Insurance Fund Binance Futures uses an insurance fund to protect bankrupt traders from losses and ensure that successful traders receive full profits. As mentioned above, when the trader's collateral amount is less than the maintenance margin, the trader's position will be forced to be liquidated. When a trader is unable to sell his position after being forced to liquidate or when all position account balances are negative, the trader is declared bankrupt. In this case, Binance will control the remaining position. Assume that the trader closes the position at a price higher than the bankruptcy price (i.e. the trader's loss does not exceed the initial margin). In this case, the entire balance of funds will be transferred to the insurance fund. But if the liquidation price is lower than the bankruptcy price, traders will lose more than their initial margin. In this case, the insurance fund will cover the deficit. Conclusion Traders should understand the concept of forced liquidation and know how to prevent it before trading cryptocurrency derivatives. Forced liquidation occurs when an individual cannot meet the market's required margin for a leveraged position. To avoid forced liquidations, it's best to keep a close eye on margin rates, use leverage responsibly, avoid accumulating too many contracts on losing positions, and use trading tools such as limit and stop orders. Read the following articles to learn more about how liquidations work in cryptocurrency trading and how to avoid them: (Blog) 3 Misconceptions About Liquidations on Binance Futures (FAQs) How to Reduce the Chances of Liquidations on Binance Futures (FAQs) ) Principle of forced liquidation of contract transactions Risk warning: Digital asset prices may fluctuate. The value of personal investments rises and falls, and the principal invested may not be recovered. You are solely responsible for your own investment decisions and Binance is not responsible for any losses you may suffer. Contract trading is more susceptible to market risks and price fluctuations.If price moves against you, your entire margin balance may be liquidated. Past performance does not reliably predict future performance. Before entering into a transaction, you should independently evaluate whether the transaction is appropriate based on your objectives and circumstances, including risks and potential rewards. If necessary, please consult your personal advisor. This article should not be construed as financial or investment advice. For more information on how to protect yourself, please visit the Responsible Trading Resources page. To learn more, please see our Terms of Use and Risk Warning.

Key PointsWhen the margin balance is lower than the maintenance margin, the position will be forced to close. The forced liquidation price refers to the price at which the trader's position triggers forced liquidation.
The bankruptcy price refers to the price at which the trader's loss is equal to the value of the deposited collateral or the initial margin amount.
For forced liquidation orders, the liquidation price corresponds to the stop loss price, while the bankruptcy price is the limit price used when the order is executed.
Forced liquidation is a common occurrence for cryptocurrency contract traders. Beginners who are not familiar with cryptocurrency derivatives may be confused by the forced liquidation of open positions.
When Binance Futures force liquidation orders, both the liquidation price and the bankruptcy price are considered. They are two important price levels that traders should understand when trading perpetual contracts. This article explains the role of liquidation price and bankruptcy price in force liquidation orders.
Interpretation of the basic knowledge of forced liquidationWhen the margin balance falls below the maintenance margin, a position will be forced to close. The margin balance refers to the sum of the wallet balance and unrealized profit and loss, while the maintenance margin refers to the minimum margin amount that a trader must maintain to avoid closing a contract position.
Binance Futures force liquidation at the Mark Price, which is the estimated true value of the contract. The Mark Price takes into account the fair value of the asset to prevent unnecessary forced liquidation during market fluctuations. The Last Price refers to the last price of the Binance Futures contract.
Liquidation Price and Bankruptcy PriceThe liquidation price is the price at which a position triggers forced liquidation. This threshold is affected by multiple factors, including the leverage used, maintenance margin ratio, the current price of the cryptocurrency, and the trader's account balance.
The bankruptcy price refers to the price at which the amount of loss of the trader is equal to the value of the deposited collateral or the initial margin. From this price, the margin balance of the user whose position is forced to be closed will be reduced to zero.
How to force close an order?The following will explain how to force a liquidation order at these two prices. In practice, a liquidation order is similar to a limit order at the bankruptcy price. For better explanation, we regard the steps of executing a liquidation order as executing a stop-loss order in two steps.
For a Take Profit Stop order, you select the Stop Price (Last Price or Mark Price) and the Limit Price at which the order will be executed. When your position reaches the Stop Price, the Limit order will be triggered and executed at the Limit Price.
We think of a liquidation order as a stop-loss order with the trigger price as the mark price. When your position reaches the mark price, the stop-loss order is triggered. For a liquidation order, the liquidation price is the stop price, and the bankruptcy price is the limit price used when the order is executed.
Therefore, when the contract price is greater than the forced liquidation price, forced liquidation begins. The bankruptcy price is the limit price used when the user's margin amount is forced to be liquidated.
Insurance FundBinance Futures uses an insurance fund to protect bankrupt traders from losses and guarantees that successful traders receive all profits.
As mentioned above, when the amount of a trader's collateral is less than the maintenance margin, the trader's position will be forced to close. If the trader is unable to sell the position after the forced liquidation or the balance of all positions in the account is negative, the trader will be declared bankrupt. In this case, Binance will control the remaining positions.
Assume that the trader's position is closed at a price higher than the bankruptcy price (i.e. the trader's loss does not exceed the initial margin). In this case, the remaining funds will be transferred to the insurance fund.
However, if the liquidation price is lower than the bankruptcy price, the trader’s losses will exceed their initial margin. In this case, the insurance fund will make up for the deficit.
in conclusionBefore trading cryptocurrency derivatives, traders should first understand the concept of forced liquidation and know how to prevent it. Forced liquidation occurs when an individual is unable to meet the margin required by the market for a leveraged position.
To avoid forced liquidations, it’s best to keep a close eye on your margin ratios, use leverage responsibly, avoid accumulating too many contracts in losing positions, and use trading tools such as stop-limit orders.
Please read the following articles for a deeper understanding of how forced liquidations work in cryptocurrency trading and how to avoid them:
(Blog) Three common misconceptions about forced liquidation on Binance Futures
(FAQ) How to reduce the chance of forced liquidation
(FAQ) The principle of forced liquidation of contract transactions
Risk Warning: Cryptocurrency prices can fluctuate. The value of your investments can go up and down, and you may not be able to recover your investment. You are solely responsible for your investment decisions, and Binance is not responsible for any losses you may incur. Futures trading is more susceptible to market risk and price volatility. If prices move unfavorably, your entire margin balance may be liquidated. Past performance is not a reliable indicator of future performance. Before trading, you should independently assess whether a trade is appropriate based on your objectives and circumstances, including the risks and potential returns. If necessary, consult your personal advisor. This article should not be considered financial or investment advice. For more information on how to protect yourself, visit the Responsible Trading Resources page. For more information, please see our Terms of Use and Risk Warning.