1. Definition
Forced liquidation occurs when your margin reaches the maintenance margin level, leading to the need for your position to be liquidated, resulting in the loss of all maintenance margins. This process is triggered when the mark price reaches the liquidation price.
- Forced Liquidation with Mark Price Calculation
HedgerX employs a mark price marking system to prevent forced liquidation resulting from insufficient liquidity or market manipulation.
- Users with Positions at the Lowest Risk Limit Tier
All open orders for the futures pair will be canceled, and existing positions will be retained.
If the maintenance margin requirement is still not met at this point, the liquidation engine will take over the position at the bankruptcy price.
2. How is Forced Liquidation Carried Out?
- Calculation of Liquidation Price in Isolated Margin Mode
Liquidation Condition: Position Margin + Floating PNL ≤ Maintenance Margin
Long Position: Liquidation Price = (Maintenance Margin - Position Margin + Average Entry Price x Quantity x Size) / (Quantity x Size)
Short Position: Liquidation Price = (Average Entry Price x Quantity x Size - Maintenance Margin + Position Margin) / (Quantity x Size)
- In Cross Margin Mode
In cross margin mode, all of the user's available margin will be used as the position margin. However, it is important to note that in this mode, the available margin balance from loss-making positions will not be used as the position margin for other cross margin positions.
From the above formulas, we can see that by manually increasing the position margin, the distance from the entry price can be increased. Therefore, users facing a higher risk of liquidation can mitigate it by manually increasing their margin.
- What Happens After the Position is Taken Over by the Liquidation Engine
When a user's position is taken over by the liquidation engine at the bankruptcy price, if the remaining position can be executed in the market at a more favorable price than the bankruptcy price, the remaining margin will be added to the insurance fund.
If the position cannot be executed at a more favorable price than the bankruptcy price, the loss from liquidation will be compensated with the insurance fund. If the insurance fund is insufficient to cover the loss, the auto deleveraging system will take over the liquidated position.
- Explanation of Risk Limits
1).Position Limits, Maximum Leverage, and Initial Margin Ratio
Before opening a position, you need to adjust the leverage multiplier.
If you do not adjust the leverage multiplier, HedgerX defaults to a leverage multiplier of 20x, and you can manually adjust the leverage.
The leverage multiplier determines the position limit. The higher the leverage multiplier, the smaller the maximum position you can open.
When you adjust the leverage multiplier, the page will display a prompt indicating your new position limit, as shown in the image below:
2). Maintenance Margin Ratio
- The maintenance margin ratio is not calculated based on the leverage multiplier adjusted by the user. Instead, it is calculated based on your position size. In other words, the maintenance margin ratio is not affected by the leverage multiplier.
- The system divides the position size into several tiers based on the underlying risk limit and incremental amount of the futures pair. Different tiers have different maintenance margin ratios. As the position size increases, the maintenance margin ratio also increases.
- For detailed information on the risk limit tiers for different futures, please refer to the Risk Limit section on the Information page.
- The maintenance margin directly affects the liquidation price. Therefore, we strongly recommend that you consider closing your position manually before your margin balance drops to the maintenance margin level to avoid liquidation.
Note
Please note that under abnormal price fluctuations and volatile market conditions, the system will take additional measures to maintain market stability, including but not limited to:
- Adjustment of maximum leverage
- Adjustment of position limits for different tiers
- Adjustment of maintenance margin ratio for different tiers
Example
BTCUSDT perpetual futures:
3. Conclusion
HedgerX Perpetual Futures employs risk limits for all trading accounts, aiming to reduce the likelihood of significant forced liquidations. The system implements a tiered margin model to limit risks, where the leverage multiplier is determined by the size of the position, with lower leverage multipliers available for larger positions. Users can adjust the leverage multiplier on their own, and the initial margin ratio calculation is based on the user-adjusted leverage multiplier.
Disclaimer: The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. Solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.