BeaconWhat Is Liquidation?
Liquidation is the forced closure of a leveraged trading position when a trader's losses approach the amount of margin (collateral) they have deposited. When you trade with leverage, you are essentially borrowing capital to control a larger position than your account balance alone would allow. The exchange requires you to maintain a minimum amount of margin to keep the position open. If the market moves against you far enough that your remaining margin falls below this minimum, the exchange will automatically close your position to prevent further losses.
Liquidation serves a critical function in leveraged markets: it ensures that losses do not exceed the collateral available, protecting both the trader (from negative balances) and the platform (from bad debt). On most modern exchanges, including Hyperliquid, a sophisticated liquidation engine monitors all positions in real time and executes liquidations at precise price levels.
Every leveraged position has a specific liquidation price - the exact price at which the exchange will close your trade. Knowing this price before you enter a position is fundamental to responsible trading. You can calculate your liquidation price using our liquidation calculator.
How Liquidation Works Step by Step
The liquidation process follows a clear sequence. First, you open a leveraged position by depositing margin. For example, you deposit $1,000 as margin and open a 10x long position on BTC, giving you $10,000 of exposure. The exchange calculates your liquidation price based on your entry price, leverage, and maintenance margin requirement.
As the market moves, your unrealized profit or loss changes. If BTC rises, your long position gains value and your effective margin increases. If BTC falls, your position loses value and your margin decreases. The exchange continuously monitors a metric called the margin ratio - the ratio of your remaining margin to the maintenance margin requirement.
When the mark price (a fair price calculated using the index and order book) reaches your liquidation price, the liquidation engine takes over. It closes your position by placing an order on the market. In isolated margin mode, the margin allocated to that position is used to cover the loss. In cross margin mode, the loss is deducted from your total account balance.
After liquidation, any remaining margin above the bankruptcy price (the price at which your losses exactly equal your margin) may be returned to you or added to the exchange's insurance fund. The specifics depend on the platform and market conditions at the time of liquidation.
Cross Margin vs. Isolated Margin
The margin mode you choose dramatically affects your liquidation risk. In isolated margin mode, each position has its own dedicated margin. If you allocate $500 to a BTC long position, only that $500 is at risk. Even if the position is liquidated, the rest of your account is untouched. This makes it easy to control exactly how much you can lose on any single trade.
Cross margin mode uses your entire available account balance as collateral for all open positions. The advantage is that your positions have more margin backing them, so they are further from liquidation. A temporary drawdown on one position can be absorbed by unrealized gains on another. However, the risk is that a single bad trade can liquidate your entire account if it moves far enough.
Most experienced traders recommend isolated margin for beginners, as it provides clear risk boundaries. Cross margin is favored by more advanced traders who are running multiple correlated positions and want the flexibility of shared collateral. On Hyperliquid, you can choose your margin mode for each position, and you can explore live market data on the markets page.
Strategies to Prevent Liquidation
The most effective way to avoid liquidation is to use lower leverage. While 50x leverage is available, using 2x to 5x gives your position significantly more room to absorb price fluctuations. A 5x long position can withstand roughly a 20% adverse move before liquidation, compared to just 2% at 50x. Lower leverage does not mean lower profits in absolute terms - you can achieve the same position size by simply depositing more margin.
Stop-loss orders are another essential tool. A stop-loss automatically closes your position at a predetermined price, limiting your losses before reaching the liquidation price. Set your stop-loss well above your liquidation price to account for slippage and sudden price movements. A good rule of thumb is to place stop-losses at least 20-30% of the distance to your liquidation price.
Proper position sizing is equally important. Never risk more than a small percentage of your total capital on a single trade. Many professional traders limit each trade to 1-3% of their account. You can calculate appropriate position sizes using the tools available on our liquidation calculator to find the right balance between position size and liquidation distance.
Cascade Liquidations and Market Impact
One of the most dramatic phenomena in crypto markets is the cascade liquidation. When a large number of leveraged positions are clustered around similar price levels, a price move that triggers the first wave of liquidations can push the price further, triggering more liquidations in a chain reaction. This self-reinforcing cycle can cause rapid, violent price movements that exceed what fundamentals would justify.
Cascade liquidations are particularly common during periods of high open interest and high leverage. When the market is heavily positioned in one direction, even a modest price move can set off a domino effect. The resulting forced selling (for long liquidations) or forced buying (for short liquidations) creates extreme volatility.
Understanding cascade dynamics helps you trade more defensively. Avoid entering heavily leveraged positions when open interest is at extremes, and be cautious of holding positions near price levels where large clusters of liquidations are likely sitting. Learn more about reading market conditions in our guide on open interest.