Liquidation is not a stop loss. It is the venue protecting itself, executed at market in whatever conditions exist, usually with a liquidation fee attached. In a violent wick it can fill worse than the stated price, and on some venues an insurance fund or auto-deleveraging absorbs the remainder.
The distance to liquidation is set almost entirely by leverage: roughly 10% at 10x, about 2% at 50x, before maintenance margin and funding pull it nearer.
The mistake it causes: treating the liquidation price as a backstop. It is a line you should never approach - put a real stop far in front of it.
How close the line really is
In isolated margin with a 0.5% maintenance requirement, liquidation sits roughly 1/leverage away from your entry. The table assumes bitcoin at $84,000.
| Leverage | Distance | Long liquidates at | Short liquidates at |
|---|
| 5x | 19.5% | $67,620 | $100,380 |
| 10x | 9.5% | $76,020 | $91,980 |
| 20x | 4.5% | $80,220 | $87,780 |
| 50x | 1.5% | $82,740 | $85,260 |
Why your real liquidation is nearer than the formula says
Three things pull it closer. Tiered maintenance margin rises with position size, so a large position may face 1% or 2.5% instead of 0.5%. Funding on perpetual contracts is deducted from your margin every eight hours, so a held position drifts toward liquidation even in a flat market. And a liquidation fee is charged on top of the loss at most venues. Treat any calculated figure, including ours, as the optimistic case.
Liquidation is not a stop loss
A stop is your own exit at a price you chose, placed where the idea is proven wrong. Liquidation is the exchange protecting itself, executed at market in whatever conditions exist. In a violent wick it can fill far past the stated level, and on some venues auto-deleveraging then closes profitable counterparties to absorb the shortfall.
A workable rule: keep your stop no further than halfway between entry and liquidation. If that stop is inside normal noise for the instrument, the leverage is wrong for the trade rather than the stop being wrong for the plan.
Isolated or cross
In isolated margin the liquidation price is fixed when you open and only the posted margin is at risk. In cross margin the entire wallet backs the position, which moves liquidation much further away until it arrives and takes everything. Beginners should stay isolated, with a deliberate amount of margin per position.
Check the exact number for your trade on the liquidation price calculator, and price the funding drag on the funding rate calculator before holding overnight.
