Complete Guide to Liquidation Price Calculation: Detailed Explanation of Isolated and Cross Margin Modes

When you open a position in futures trading, the most critical risk to watch out for is liquidation. While calculating the liquidation price isn’t complicated, understanding the underlying logic is essential. This article will start from basic concepts, thoroughly explain how the liquidation mechanism works, and how to calculate it under different margin modes.

Understanding Liquidation: Why Focus on the Liquidation Price Calculation

Liquidation occurs when the mark price (the real-time market price) reaches the liquidation price, triggering the system to automatically close your position. At this point, your margin balance has fallen below the maintenance margin requirement. Simply put, liquidation is a forced stop-loss when losses reach a certain level.

For example: Suppose your liquidation price is set at 15,000 USDT, and the current mark price is 20,000 USDT. When the mark price drops to 15,000 USDT, the system will trigger liquidation, automatically closing your position. Your unrealized loss has already reached the level of the maintenance margin.

Understanding how to calculate the liquidation price hinges on two variables: initial margin (the funds required to open the position) and maintenance margin (the minimum funds needed to keep the position open). The difference between these two determines how much loss you can withstand.

Isolated Margin Mode: Independent Risk and Liquidation Calculation

In isolated margin mode, each position has its own margin, completely separate from your account balance. The advantage of this mode is that the risk of one position does not affect the entire account.

Formula for Calculating Liquidation Price in Isolated Margin Mode

For long (buy) positions: Liquidation Price = Entry Price − [(Initial Margin − Maintenance Margin) ÷ Contract Quantity] − (Additional Margin ÷ Contract Quantity)

For short (sell) positions: Liquidation Price = Entry Price + [(Initial Margin − Maintenance Margin) ÷ Contract Quantity] + (Additional Margin ÷ Contract Quantity)

In these formulas:

• Position Value = Contract Quantity × Entry Price
• Initial Margin (IM) = Position Value ÷ Leverage
• Maintenance Margin (MM) = (Position Value × Maintenance Margin Rate) − Maintenance Margin Deduction
• Maintenance Margin Rate (MMR) depends on risk level

Practical Examples in Isolated Margin Mode

Example 1: Long position with 50x leverage

Trader A opens a 1 BTC long position at 20,000 USDT with 50x leverage, maintenance margin rate of 0.5%, no additional margin:

• Initial Margin = 1 × 20,000 ÷ 50 = 400 USDT
• Maintenance Margin = 1 × 20,000 × 0.5% − 0 = 100 USDT
• Liquidation Price = 20,000 − (400 − 100) = 19,700 USDT

This means when BTC drops to 19,700 USDT, the position will be liquidated.

Example 2: Short position with additional margin

Trader B also opens a 1 BTC short at 20,000 USDT with 50x leverage, then manually adds 3,000 USDT margin:

• Initial Margin = 1 × 20,000 ÷ 50 = 400 USDT
• Maintenance Margin = 100 USDT (same as above)
• Liquidation Price = [20,000 + (400 − 100)] + (3,000 ÷ 1) = 23,300 USDT

Adding margin significantly raises the liquidation price, providing more buffer against losses.

Example 3: Impact of funding fees on liquidation

Trader C opens a long position at 20,000 USDT with 50x leverage; initial liquidation price is 19,700 USDT. However, a funding fee of 200 USDT is incurred, and the available balance is insufficient to cover it. The fee is deducted from the margin:

• Initial Margin = 400 USDT, Maintenance Margin = 100 USDT
• New Liquidation Price = [20,000 − (400 − 100)] − (−200 ÷ 1) = 19,900 USDT

Funding fees erode the margin, causing the liquidation price to move closer to the mark price, making liquidation more likely.

Cross Margin Mode: Shared Funds and Complex Scenarios

In cross margin mode, multiple positions share the account’s available balance. This means losses in one position directly affect the liquidation prices of others.

Key Features of Cross Margin Mode

In cross margin mode, initial margins are allocated per position, but the remaining available balance is shared across all positions. When unrealized losses occur in one position, the shared balance decreases, causing the liquidation prices of other positions to shift closer to the mark price.

Liquidation only occurs when the available balance drops to zero and the maintenance margin is insufficient to sustain the positions.

Formula for Calculating Liquidation Price in Cross Margin Mode

For positions with unrealized gains:

• LP (Long) = [Entry Price − (Available Balance + Initial Margin − Maintenance Margin)] ÷ Net Position Quantity
• LP (Short) = [Entry Price + (Available Balance + Initial Margin − Maintenance Margin)] ÷ Net Position Quantity

For positions with unrealized losses:

• LP (Long) = [Current Mark Price − (Available Balance + Initial Margin − Maintenance Margin)] ÷ Net Position Quantity
• LP (Short) = [Current Mark Price + (Available Balance + Initial Margin − Maintenance Margin)] ÷ Net Position Quantity

Practical Cross Margin Examples

Example 1: Basic calculation for a single position

Trader A uses 100x leverage to open a 2 BTC long position at 10,000 USDT, with 2,000 USDT available balance:

• Maintenance Margin = 2 × 10,000 × 0.5% = 100 USDT
• Max Loss Tolerance = 2,000 − 100 = 1,900 USDT
• Price drop tolerated = 1,900 ÷ 2 = 950 USDT
• Liquidation Price = 10,000 − 950 = 9,050 USDT

The system reserves 200 USDT as initial margin; remaining available balance is 1,800 USDT.

If the price rises to 10,500 USDT, unrealized profit is 1,000 USDT:

• Max loss tolerance increases accordingly, but the liquidation price remains at 9,050 USDT, unaffected by unrealized gains.

Example 2: Hedging multiple positions

Trader B holds multiple positions with 100x leverage and 3,000 USDT available:

• Long: 2 BTC at 10,000 USDT, unrealized loss of 1,000 USDT
• Short: 1 BTC at 9,500 USDT

The short position is unlikely to be liquidated due to its small size. For the long position, the net risk is considered:

• Initial Margin = (1 × 10,000) ÷ 100 = 100 USDT
• Maintenance Margin = 50 USDT
• LP (Long) = [9,500 − (3,000 + 100 − 50)] ÷ 1 = 6,450 USDT

Example 3: Cross margin with multiple contracts

Trader C holds BTCUSDT long and ETHUSDT short positions, with 2,500 USDT available:

• BTCUSDT long: 1 BTC at 20,000 USDT, unrealized loss 500 USDT, mark price 19,500 USDT
• ETHUSDT short: 10 ETH at 2,000 USDT, unrealized profit 100 USDT

Adding a new USDT short position with 240 USDT initial margin reduces available balance to 1,700 USDT:

• New liquidation price for BTCUSDT long = 17,200 USDT
• For USDT short, liquidation price = 0.788 USDT
• For ETHUSDT short, liquidation price = 2,200 USDT

Risks and Tips for Calculating Liquidation Prices

From these examples, it’s clear that in cross margin mode, unrealized losses in one position can erode shared available funds, causing other positions’ liquidation prices to approach the mark price. When available balance reaches zero, liquidation prices stabilize at their respective maintenance margins and no longer change, except for ongoing funding fees which gradually reduce initial margin, pushing liquidation prices closer to the mark price.

This underscores the importance of understanding liquidation price calculations—they serve as early warnings, allowing traders to proactively manage risk before losses fully deplete available funds.

Summary: Choosing the Right Margin Mode

Isolated Margin Mode suits traders who prefer risk independence and clear risk per trade. Its liquidation price calculation is straightforward and stable.

Cross Margin Mode is suitable for traders employing hedging strategies but requires close monitoring of available balance and dynamic liquidation prices.

Regardless of the mode, understanding the logic behind liquidation price calculation is fundamental to risk management. Regularly check your liquidation prices to ensure they align with your trading strategy, enabling you to trade more confidently in futures markets.