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Liquidation is a key part of leveraged trading. Here is a guide on how liquidation works.
Perpetual futures are leveraged instruments meaning it allows you to open a leveraged position for a given amount of collateral. Leverage helps to magnify a position size using the same amount of collateral by borrowing additional funds. Leveraged trading amplifies both profits and losses and is highly risky.
For example, if you open a 2x leveraged long position using 100 kUSDC, your total initial position is worth 200 kUSD and 100 kUSD of that position's value is borrowed. The collateral of 100 kUSD will be fully utilized if the underlying falls by 50%.
The liquidation mechanism is used to square off positions that are falling short of minimum margin requirements.
Margin is the amount of collateral posted while entering a trade.
A sudden price movement could put the exchange at risk as the losses could exceed the margin.
Therefore, the exchange imposes a minimum margin ratio requirement to help in liquidation during adverse market conditions.
Margin=Collateral+UnrealizedPnL+CummulativeFundingPaymentMargin = Collateral + Unrealized PnL + Cummulative Funding Payment
MarginRatio=Margin/PositionNotionalMargin Ratio = Margin / Position Notional