Liquidation is the process of closing a trader’s position due to the loss of all, or nearly all, of the trader’s Initial Margin. On Phemex, your position is automatically closed if the market price reaches your liquidation price. Long positions have a liquidation price lower than the original entry price and vice versa for short positions.
Contracts on Phemex can be highly leveraged. To keep these positions open, you are required to hold a percentage of the value of the position on the exchange, known as the Maintenance Margin percentage. If you cannot fulfill your maintenance requirement, your positions will be liquidated and your maintenance margin will be lost. Phemex uses a Fair Price Marking mechanism to help users avoid forced-liquidations due to lack of liquidity or manipulation.
Risk Limits also apply to larger position sizes that require higher margin levels. This extra margin allows our liquidation system to operate more efficiently with large positions that would otherwise be difficult to close safely. When liquidation is triggered, our system will cancel any open orders for that current contract in an attempt to free up funds to maintain the position. Orders on different contracts will still remain open. Additionally, Phemex employs a partial liquidation process. Positions will be closed and liquidated in increments until funds can cover the maintenance margin again.
Phemex also offers a variety of tools to help you minimize risk:
Stop Limit Orders
Allow you to set a price at which the order automatically closes before liquidation.
Stop Market Orders
Are Stop orders that remain inactive until your order is triggered.
Take Profit Orders
Also allow you to set a target price at which a position will close. This order is used to ensure a certain amount of profit, rather than for cutting losses.
Take Profit Market Orders
Are the same as Take Profit Limit Orders except your order will be triggered at the market price and not a target price.
How is the liquidation price decided?
Your liquidation price is proportional to your level of leverage. If you trade with high leverage, your liquidation price will be closer to your entry price. Conversely, if you trade with lower leverage, there will be a larger distance between your liquidation price and entry price. Lower leverage reduces your risk of having your positions automatically closed and liquidated.
What is the purpose of the insurance fund?
In the event that your positions keep worsening, without an insurance fund, you could end up owing more than your initial position. The insurance fund is there to prevent this from happening.
How can I manage risk and avoid liquidation?
The two best recommended methods is to employ Stop Limit Orders and low leverage trading (between 3x and 5x for instance).
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