Article 3.3: Liquidations – How Do They Affect Your Trading?
The Liquidation Trap – How to Avoid the #1 Killer in Crypto Trading
For every trader celebrating a 10x leveraged win, there are ten others who lost everything to liquidation.
Liquidation is the greatest risk in perpetual trading. Unlike in spot trading, where a trader simply holds their asset and waits for price recovery, leverage trading exposes you to forced liquidation if your margin balance becomes too low.
📌 Key Truth: If you don’t manage your leverage and risk, the market will eventually liquidate you. No exceptions.
In this article, we’ll break down:
✅ What liquidation is & why it happens
✅ How exchanges like RabbitX execute liquidations
✅ How to calculate liquidation price & monitor margin health
✅ Strategies to avoid liquidation & manage risk effectively
🛠 What is Liquidation?
Liquidation occurs when a trader’s margin balance falls below the maintenance margin required to keep a leveraged position open.
When this happens, the exchange automatically force-closes the position, preventing further losses but wiping out the trader’s collateral.
Let’s break it down with an example:
🔹 Suppose you open a 10x long position on ETH at $3,000 with $1,000 collateral.
🔹 Your total position size is $10,000 ($1,000 x 10 leverage).
🔹 If ETH drops 10% to $2,700, your collateral is gone, and you are liquidated.
💡 Higher leverage means you get liquidated faster!
🔍 How Liquidation Works on RabbitX
RabbitX, like most perpetual exchanges, automatically liquidates positions when margin balance falls below maintenance margin requirements.
📌 What happens when you get liquidated on RabbitX?
1️⃣ Your position is force-closed by the liquidation engine.
2️⃣ You lose your entire margin balance (but not more).
3️⃣ If partial liquidation is enabled, RabbitX will reduce position size instead of fully closing it (if possible).
💡 RabbitX Partial Liquidation System:
Instead of wiping out your entire trade, RabbitX will first attempt to reduce your leverage by liquidating a part of your position.
This protects traders from total account wipeouts, unlike exchanges that fully liquidate everything instantly.
📌 Where to Check Liquidation Risk on RabbitX?
✅ Go to RabbitX Perpetual Trading Dashboard.
✅ Look at your Margin Balance & Liquidation Price.
✅ Adjust margin or close positions before liquidation happens.
⚠️ The Truth Behind Liquidation Traps
Many traders don’t just get liquidated by accident—they get baited into liquidation traps.
1️⃣ Stop Hunt & Liquidation Cascades
Whales & market makers know that retail traders often place liquidation stops at predictable levels.
To profit off liquidations, whales:
🔹 Push price up or down aggressively to liquidate overleveraged traders.
🔹 Once liquidations trigger, they cause cascading sell-offs, sending prices even lower.
🔹 Whales then buy the bottom after weak hands are flushed out.
💡 Example: BTC at $100,000 → Whales push it down to $95000 → Overleveraged longs liquidated → More forced selling → BTC crashes to $90,000 → Whales buy the dip.
🚀 Pro Tip: Avoid putting stop-losses too close to liquidation price. Whales are hunting those levels.
2️⃣ High-Leverage "Lottery Tickets"
Retail traders love using 50x or 100x leverage, hoping for quick gains. The reality? 99% of these positions get liquidated.
🔹 A 100x leveraged position liquidates with just a 1% price movement.
🔹 Market makers love these traders because they feed liquidation engines.
📌 Golden Rule:
Use 3x-5x leverage for safe trading.
Never risk more than 2% of your account on a single trade.
3️⃣ Flash Crashes & Exchange Glitches
Sometimes, traders get liquidated even when they did nothing wrong due to:
✅ Exchange outages (e.g., Binance, FTX halting trades in 2021).
✅ Low-liquidity periods (e.g., weekend crashes).
✅ Oracle failures (incorrect price feeds).
💡 How to Protect Yourself?
✔ Use multiple stop-losses (hard & trailing).
✔ Avoid trading high-leverage during low-liquidity hours (weekends).
✔ Trade on trusted platforms like RabbitX with strong liquidation systems.
📈 How to Calculate Liquidation Price (RabbitX)
The liquidation price is where your margin balance becomes zero.
🔢 Liquidation Price Formula:
Liquidation Price=Entry Price−(Margin×LeveragePosition Size)\text{Liquidation Price} = \text{Entry Price} - \left( \frac{\text{Margin} \times \text{Leverage}}{\text{Position Size}} \right)Liquidation Price=Entry Price−(Position SizeMargin×Leverage)
✅ Example:
You long BTC at $50,000 with $5,000 margin and 10x leverage.
If BTC drops 10% to $45,000, you are liquidated.
🔹 Higher leverage = Closer liquidation price!
🛡️ How to Avoid Liquidation – 5 Survival Strategies
The best traders don’t just win trades—they avoid unnecessary liquidations.
✅ 1. Use Lower Leverage (3x-5x is Ideal)
Using lower leverage gives you more breathing room before liquidation.
📌 Example:
10x leverage = Liquidation happens at a 10% move against you.
3x leverage = Liquidation happens at a 33% move against you.
🚀 Pro Tip: If you’re using high leverage, always set stop-losses to exit before liquidation price.
✅ 2. Set Stop-Loss Orders Above Liquidation Price
A stop-loss is your safety net—it prevents you from hitting liquidation levels.
📌 Example (Setting Stop-Loss on RabbitX):
You long ETH at $3,000.
Instead of risking liquidation at $2,700, you place a stop-loss at $2,850.
If the trade moves against you, you exit early before full liquidation.
💡 Stop-loss placement = The difference between controlled losses & total wipeout.
✅ 3. Use Cross-Margin Instead of Isolated Margin
📌 Cross Margin: Uses your entire account balance to prevent liquidation.
📌 Isolated Margin: Uses only allocated margin for that position.
✔ When to Use Cross Margin: If you want more protection against liquidation.
✔ When to Use Isolated Margin: If you want to limit risk to a single trade.
✅ 4. Monitor Funding Rates & Adjust Positioning
📌 Why it matters?
If funding rates are high, it’s expensive to hold long positions.
If funding rates are negative, short positions get paid.
✔ Use RabbitX’s funding rate indicator to adjust positions accordingly.
📌 Key Takeaways from Article 3.3
✔ Liquidation occurs when margin balance falls below maintenance margin.
✔ Higher leverage = Higher liquidation risk.
✔ RabbitX offers partial liquidation to reduce total losses.
✔ Using stop-losses, cross-margin, and hedging reduces liquidation risk.
✔ Black swan events (e.g., May 2021 crash) prove why liquidation risk is real.
🚀 Next Up: Mastering Leverage & Position Sizing – Trade Smart, Not Reckless!