What is liquidation (margin liquidation)?

What is liquidation (margin liquidation)?

In TradFi trading, liquidation is an automated risk management mechanism. When an account's equity is insufficient to meet margin requirements, the platform will liquidate one or more open positions to prevent further losses and protect both the trader and the platform. This mechanism is typically triggered when the account's margin level reaches or falls below a predefined stop-out level, and positions are liquidated according to preset rules.

What triggers liquidation?

For Gate TradFi (MT5), liquidation is triggered based on the Margin Level:

• Margin Level = (Equity / Used Margin) × 100%

• Equity = Balance + Unrealized PnL

• Used Margin = Total Margin Occupied by Open Positions

• Stop-Out Level: 50% When the margin level falls to 50% or below, the liquidation will be triggered.

Liquidation Process (Step-by-Step)

Once the stop-out level is triggered, the platform's liquidation system will take over and manage the positions that need to be closed. The process is typically carried out as follows:

1. Cancel all pending orders to release available margin and prevent new orders from interfering with the liquidation process.

2. Close positions in batches at market price based on the "Largest Loss First" principle:

3. The system will first close the position with the largest unrealized loss, followed by the next largest, and so on, until the margin level rises above 50% or all positions have been closed.

4. Liquidation orders are filled at market prices. Actual fill prices may differ from theoretical prices due to market liquidity, order book depth, and slippage.

5. During the liquidation process, if the margin level rises above 50%, the liquidation will stop. Otherwise, positions will continue to be closed until the stopping condition is met or all positions are liquidated.

6. In extreme market or liquidity conditions where positions cannot be fully closed within a short period of time, the platform may apply additional risk control measures (such as restricting new positions, requiring additional margin, or imposing other contract or account limitations) and handle any abnormal balances in accordance with platform rules and agreements.

Note: TradFi accounts are generally liquidated directly at market price and do not involve insurance funds or Auto-Deleveraging (ADL) mechanisms commonly used in some derivatives markets. If a negative balance occurs, the user is responsible for covering the deficit in accordance with the platform agreement.

Related Calculations and Examples

• Margin Level Calculation Example Assume: Account Balance = 10,000 USD, Unrealized Loss = −6,000 USD, Used Margin = 4,000 USD Equity = 10,000 – 6,000 = 4,000 USD Margin Level = (4,000 / 4,000) × 100% = 100% (No Liquidation Triggered)
• If the unrealized loss increases to −8,000 USD: Equity = 2,000 USD, Margin Level = (2,000 / 4,000) × 100% = 50% (Liquidation Triggered)
• Largest Loss First Example Assume the account has two open positions: The unrealized loss of Position A is −1,200 USD, and the unrealized loss of Position B is −300 USD. When the margin level falls to 50% or below, the system will first close Position A (the one with the largest loss) at market price. If the margin level does not rise above 50% after closing Position A, Position B will then be closed. This process continues until the stopping condition is met or all positions are liquidated.

Factors Affecting Liquidation

• Exit Price: Market liquidity and depth may cause slippage, resulting in actual exit prices that differ from expectations.
• Trading Fees and Overnight Interest: Trading fees and other applicable charges are applied during liquidation and will affect final PnL and equity.
• System or Network Latency: Extreme market conditions may cause delays that impact fill speed and prices.
• Leverage and Margin Settings: Higher leverage brings the stop-out level closer and increases liquidation risk.

Risk Warnings and Recommendations

• Monitor your margin level (equity and used margin) closely and manage position size and stop-loss levels appropriately.
• Use reasonable leverage and maintain sufficient available margin to reduce liquidation risk.
• During periods of high volatility, be aware of potential slippage and fill delays; consider adding margin or reducing positions proactively.
• Carefully read and understand the platform's rules regarding margin, liquidation, and negative balance handling.