Liquidation Thresholds

Liquidation Thresholds are the specific price points or margin levels at which a trader's position is automatically closed by the exchange to prevent the account balance from falling below zero. These thresholds are determined by the initial margin provided and the maintenance margin required by the protocol.

When an asset's price hits this threshold, the liquidation engine takes control, selling or buying the collateral to cover the debt. In volatile crypto markets, these thresholds are critical because they define the "survival zone" for a leveraged trade.

If a market moves too quickly, a position may be liquidated before the trader can add more collateral, leading to realized losses. Exchanges often use a tiered liquidation system to manage large positions without causing excessive market disruption.

Understanding these thresholds is a fundamental part of risk management for any trader using margin, as they dictate the hard limit of one's exposure.