Most people select isolated or cross margin and then never touch that setting again. But it actually determines the price at which the system will forcibly take the money in your account. To understand this, we first need to get clear on something more fundamental: how exactly is the liquidation price calculated?

Let’s start with the bottom line. Liquidation happens when your margin falls below the minimum required by the exchange. The system doesn’t wait for your consent—it forcibly closes the position. The liquidation price is the price at which your margin is just depleted and your position is forcibly closed. Note that this means “your margin is depleted,” not “you’ve lost a certain amount.” We’ll take a closer look at the difference later.

To calculate this number, you need four things: entry price, direction, leverage, and margin amount. Opening a position means buying or selling a contract to officially establish the trade—the price at the moment you confirm is the entry price. Direction means whether you go long or short. Leverage determines how much you borrow. Margin is the portion you put up yourself.

Let’s walk through a specific example. You go long with 10x leverage at an entry price of $100. 10x means you put up only one-tenth of the money, and the exchange lends you the rest. For every 1% the price drops, you lose 10% of your own funds. So when the price falls to around $90—down 10%—your margin is basically wiped out, and your liquidation price is about $90. Now, with the same $100 entry price, suppose you crank the leverage up to 50x. The price only needs to move 2%—that is, drop to $98—and you’re out. With the same entry price, switching from 10x to 50x leverage moves the liquidation price from $90 to $98, a full eight dollars closer to the current price. That’s why people using high leverage often feel like they “got liquidated as soon as they opened a position”—it’s not bad luck; the liquidation price is already right next to their entry price.

Now let’s look at the difference between isolated and cross margin. Isolated margin means this trade uses only the margin you allocated to it. If it’s wiped out, it’s gone; the other funds in your account aren’t involved. Cross margin also uses the other balance in your account as a buffer, so the liquidation price is pushed farther away—the system uses up the rest of your account funds before closing the position. The trade-off is clear, too: if you get liquidated using cross margin, you lose more than just the money in this one trade. Neither mode is absolutely better or worse, and exchanges also differ in their default settings.

Trading interfaces usually show an “estimated liquidation price,” and many people treat it as a fixed number. It isn’t. Funding fees are settled periodically and either deducted from or added to your margin. When your margin changes, your liquidation price changes with it. If you manually add funds to your account—that is, add margin to push the liquidation price farther away from the current price—that number will move outward immediately as well. So the estimate on the screen is only a snapshot of the current moment, not something set in stone.

Here’s the part people most often get wrong: many think the liquidation price is “the price where I start losing money.” It’s exactly the opposite. The liquidation price is where your margin is depleted, not the limit of your losses. You’re losing money all the way up to that point; you just haven’t lost it all yet. When the price reaches it, your capital is gone and your position is forcibly closed. In other words, the liquidation price marks the finish line, not the starting point. Once you understand that, you won’t look at the estimate and mistakenly think you’re safe above $90.

So the most important takeaway from this lesson is: the liquidation price is determined by the entry price, direction, leverage, and margin together. The higher the leverage, the closer it is to the current price. And it marks the point where your margin is depleted, not the limit of your losses.

📖 This course updates with one lesson each day and has 42 lessons in total. See the pinned course index post for the full list.

⏭ Next lesson: Lesson 24 · What is a funding rate?

⚠️ Any examples in this course are for illustrative purposes only and do not constitute investment advice.

Next time you come across a question about “how the liquidation price is determined,” you’ll know where to start looking.