How to Calculate the Liquidation Price on a Reverse Contract

Every trader should understand how to calculate the liquidation price to effectively manage risks when trading on Gate.io. The liquidation price is a critical level at which your position is automatically closed by the system.

Liquidation Trigger Mechanism: Key Concepts

Liquidation is triggered in two cases. The first is when the mark price reaches the set liquidation price, resulting in an automatic closure of the position at the bankruptcy price (zero margin level). The second is when the margin balance of the position falls below the required maintenance margin level.

Imagine this situation: you opened a position with a liquidation price set at $15,000, and the current mark price is $20,000. If it drops to $15,000, this indicates the liquidation threshold has been reached, and unrealized losses have approached the minimum maintenance margin level. At this point, the system initiates the position closing process.

Calculation in Isolated Margin Mode: Step-by-Step Guide

In isolated margin mode, everything is simple and predictable. The margin allocated for a specific position is completely separated from the rest of the account balance. This means the maximum loss is limited to the amount you allocated.

Formulas for Long and Short Positions

For a long position (buy):

Liquidation Price = Number of Contracts / [Position Value + (Initial Margin − Maintenance Margin)]

For a short position (sell):

Liquidation Price = Number of Contracts / [Position Value − (Initial Margin − Maintenance Margin)]

Where each component is calculated as:

• Position Value = Number of Contracts / Average Entry Price
• Initial Margin = Position Value / Leverage
• Maintenance Margin = (Position Value × Maintenance Margin Rate) − Maintenance Margin Deduction

Remember, the maintenance margin rate directly depends on your set risk limit. Also, note that trading fees for closing positions may cause slight deviations from the theoretical liquidation price.

Practical Calculation Examples

Example 1: Long position with high leverage

Trader A opens a long position of $100,000 in BTCUSD at an entry price of $50,000 with 50x leverage. Maintenance margin is 0.5%, with no additional funds added.

Calculations:

• Position Value = 100,000 / 50,000 = 2 BTC
• Initial Margin = 2 / 50 = 0.04 BTC
• Maintenance Margin = 2 × 0.5% − 0 = 0.01 BTC
• Liquidation Price = 100,000 / [2 + (0.04 − 0.01)] = $49,261.08

This means the price must drop by nearly 1.5% to trigger liquidation.

Example 2: Short position with moderate leverage

Trader B opens a short position of $60,000 in BTCUSD at an entry price of $50,000 with 10x leverage. Maintenance margin is 0.5%.

Calculations:

• Position Value = 60,000 / 50,000 = 1.2 BTC
• Initial Margin = 1.2 / 10 = 0.12 BTC
• Maintenance Margin = 1.2 × 0.5% − 0 = 0.006 BTC
• Liquidation Price = 60,000 / [1.2 − (0.12 − 0.006)] = $55,248.61

Here, the price can rise about 10.5% before liquidation occurs.

Example 3: Impact of funding fees on margin

Trader C opens the same long position from Example 1 (initial liquidation price $49,261.08). However, the system charges a funding fee of 0.01 BTC, and the account balance is insufficient. The system deducts this fee from the position margin, bringing the liquidation price closer to the mark price, increasing risk.

New liquidation price:

Liquidation Price = 100,000 / [2 + (0.04 − 0.01 − 0.01)] = $49,504.95

A 0.01 BTC reduction in margin raises the liquidation price by approximately $243.87.

Cross Margin: Dynamic Calculation of Liquidation Price

Cross margin mode operates differently. The initial margin for each position remains allocated, but the remaining balance is shared across all open positions. This means the liquidation price constantly changes depending on unrealized P&L across all trading pairs.

Liquidation occurs only when total available funds are insufficient to maintain the position at the maintenance margin level.

Formulas for Cross Margin Mode

For a long position:

Liquidation Price = Number of Contracts / [Position Value + (Initial Margin − Maintenance Margin) + Available Funds]

For a short position:

Liquidation Price = Number of Contracts / [Position Value − (Initial Margin − Maintenance Margin) + Available Funds]

Practical Example of Cross Margin Mode

Trader D opens a long position of $50,000 in perpetual BTCUSD contract at an entry price of $25,000 with 20x leverage. The account has 0.5 BTC free funds. Maintenance margin is 0.5%.

Calculations:

• Position Value = 50,000 / 25,000 = 2 BTC
• Initial Margin = 2 / 20 = 0.1 BTC
• Maintenance Margin = 2 × 0.5% − 0 = 0.01 BTC
• Available Funds = 0.5 BTC
• Liquidation Price = 50,000 / [2 + (0.1 − 0.01) + 0.5] = $9,652.50

If other positions incur losses and reduce available funds, the liquidation price will increase. Conversely, profitable positions will lower the liquidation price, giving the position more “room.”

Key Recommendations for Safe Trading

Understanding how to calculate the liquidation price is crucial for risk management. Remember, high leverage brings the liquidation price closer to the current price. With 50x leverage or higher, even a 2% price movement can lead to liquidation. Always leave a sufficient buffer between the current mark price and your calculated liquidation price, regularly check the actual liquidation price in the Gate.io interface, and keep in mind that funding fees can constantly alter this level.