Liquidation & Risk Management

Trading perpetual futures can be exciting and profitable, but it's important to understand the risks involved, especially the concept of liquidation. At Arcex, we want you to trade with confidence, and that starts with understanding how to manage your risk and protect your account.

What is liquidation?

Liquidation occurs when your position is automatically closed by the platform because your losses have approached the amount of collateral (margin) you have in your account. In other words, if the market moves too far against your position, the system will close it to prevent you from losing more money than you have.

Think of liquidation as a safety mechanism. It protects both you and the platform from going into negative balance. However, getting liquidated means you lose the collateral you had allocated to that position, so it's something you definitely want to avoid.

Your Safety Indicator: The Distance to Liquidation Bar

Instead of forcing you to calculate complex margin ratios, we've made it simple to see your risk level at a glance with the Distance to Liquidation bar.

Think of this bar as your account's safety gauge. It shows you exactly how close you are to being liquidated. The percentage number on the right hand side of the bar is the asset's distance from your liquidation.

• When the bar is on the far left: You are in a very safe position with plenty of room for the market to move.

• As the bar moves to the right: Your risk is increasing. The market is moving against you, and your position is getting closer to being liquidated.

• When the bar reaches the far right: Your position is in immediate danger of being liquidated. You should take action to manage your risk.

Your goal is to keep this bar as far to the left as possible.

How to Avoid Liquidation

The good news is that liquidation is entirely avoidable if you manage your risk properly. Here are some key strategies to keep your account as safe as possible:

1. User lower leverage

   1. The higher your leverage, the faster your Distance to Liquidation bar will move to the right with small price changes.

   2. If you're using 100x leverage, even a 1% move against your position could put you at risk. Starting with lower leverage (like 2x or 3x) gives your positions much more room to breathe.

2. Don't use your whole account

   1. It might be tempting to use all of your available funds to maximize your position size, but this is risky. Always keep a buffer in your account. If you only use a portion of your balance for trading, you'll have extra collateral to absorb losses, which will keep your liquidation bar further to the left.

3. Watch Your Distance to Liquidation Bar

   1. Keep a close eye on this bar for all your open positions. If you see it starting to move to the right, it's a warning sign. This is your cue to consider one of the other risk management strategies, like reducing your position size or adding more collateral to your account.

4. Set Stop-Loss Orders

   1. A stop-loss order is an order that automatically closes your position if the price reaches a certain level. This allows you to limit your losses and exit a trade before your liquidation bar gets too far to the right. While stop-losses won't prevent liquidation entirely, they give you more control over your risk.

5. Understand Your Liquidation Price

   1. For each position you open, Arcex will still show you the estimated liquidation price or the price at which your position will be automatically closed. Make sure you're aware of this number and that it's far enough away from the current market price to give you a reasonable margin of safety.

Partial vs. Full Liquidation: A Protective Feature

One of the most important things to understand is that liquidation on Arcex is not an all-or-nothing event. Our system is designed to protect you by liquidating only the minimum amount necessary to bring your account back to a safe level.

This means that in many cases, you will only be partially liquidated. Instead of closing your entire position, the system will only close a small portion of it. This is a key feature that helps preserve your capital and gives you a chance to recover from a losing trade.

Of course, in cases of extreme leverage or very sudden market movements, a full liquidation is still possible. But whenever feasible, the system will always opt for a partial liquidation first.

What Happens During Liquidation?

If your account is liquidated, here's what happens:

1. Your open orders are canceled: Any pending orders you have in the market are automatically canceled.

2. Your positions are closed: Your open positions are transferred to liquidators at a discount, rather than being dumped on the open market. This helps minimize the impact on the market and protects other traders.

3. A liquidation fee is charged: A small fee is deducted from your remaining balance, which is split between the insurance fund and the liquidator.

At Arcex, we use a decentralized liquidation model, which means that positions are transferred to other traders (liquidators) rather than being forcefully sold on the order book. This approach is fairer and helps prevent cascading liquidations that can harm the entire market.

Final Thoughts

Liquidation is a reality of leveraged trading, but it's also entirely preventable with proper risk management. At Arcex, we've built intuitive tools like the Distance to Liquidation bar to help you monitor your account and make informed decisions. Use lower leverage, keep a buffer in your account, and always know your liquidation price. Trading should empower you, not put you at unnecessary risk.