What is Forced Liquidation in Contract Trading?
Forced liquidation (or "强平" in Chinese) occurs when a trader's margin balance falls below the maintenance margin requirement. At this point, the exchange automatically closes the position to prevent further losses. The remaining collateral is absorbed into the exchange's risk reserve fund.
Key Factors Affecting Liquidation Price
- Maintenance Margin Rate: The minimum margin required to keep a position open.
- Leverage Used: Higher leverage increases liquidation risk.
- Market Volatility: Rapid price swings can trigger premature liquidation.
Comparative Analysis of Liquidation Algorithms
Major exchanges calculate liquidation prices differently based on their maintenance margin rates. Below is a comparison across platforms for BTC contracts:
| Exchange | Maintenance Margin Rate | Liquidation Price (Relative to Market) |
|----------------|--------------------------|-----------------------------------------|
| OKEX | 0.5%-1.5% | Moderate |
| Binance | 2.5%+ | Highest |
| Huobi | 0.5%-2% | Lower than Binance |
| CCFOX | 0.3%-1% | Lowest |
Example: A trader using 10x leverage on BTC/USDT contracts will liquidate soonest on Binance due to its high margin requirements.
Why Does Liquidation Happen?
- Margin Depletion: Price moves against your position, eroding collateral.
- Funding Gaps: Negative funding rates in perpetual swaps accelerate losses.
Risk Reserve Funds: Where Does Your Money Go?
When liquidation occurs, exchanges typically transfer leftover funds to their risk reserve pool. This serves two purposes:
- Covering Insurance Claims: Compensates for "underwater" losses (when account equity < 0).
- Reducing Auto-Deleveraging (ADL): Subsidizes users affected by ADL events.
Platform Policies on Reserve Fund Allocation
| Exchange | Injection Rate | User Refund |
|-----------|----------------|-------------|
| OKEX | 100% | No |
| Binance | 100% | No |
| CCFOX | 50% | Yes (50%) |
👉 Learn how to mitigate liquidation risks
Why CCFOX’s Approach Stands Out
CCFOX’s 50% refund policy and lower liquidation thresholds benefit both traders and the platform:
- For Traders: More survivability = Longer trading lifespan.
- For Exchanges: Retains users who generate continuous fees instead of one-time liquidation revenue.
"Sustainable platforms prioritize repeated transactions over one-time liquidations."
FAQs
Q1: How can I avoid forced liquidation?
- Monitor margin ratios closely.
- Use lower leverage (5x-10x instead of 20x+).
Q2: Does OKEX refund any liquidation proceeds?
- No. OKEX injects 100% into its risk fund.
Q3: Which exchange has the lowest liquidation risk?
- CCFOX, due to its flexible margin requirements and partial refunds.
Q4: Why do exchanges want liquidations?
- Short-term revenue boost, but it drives users away long-term.
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Final Thoughts
Exchanges like Binance prioritize liquidation revenue, while others (e.g., CCFOX) focus on user retention. Smart traders should:
- Compare margin requirements.
- Opt for platforms that balance profitability and trader longevity.