Liquidation occurs when your account no longer has enough funds to maintain your open positions. Here's a simple explanation of how this works in a perpetual exchange using cross margin, like Perplex does:
Shared Pool of Funds
In a cross margin setup, all your available funds in the account are pooled together to support all your open positions.
Losses and Account Balance
As market prices move, the value of your open positions fluctuates. If the market moves against your position (e.g., the price drops when you have a long position), you start to incur losses. These losses are deducted from your account balance.
Margin
- Margin Requirement: Each position you open requires a certain amount of margin (collateral) to stay open.
- Maintenance Margin: There is a minimum amount of margin, called the maintenance margin, that you must maintain to keep your positions open. If your account balance falls below this level, your position is at risk of liquidation.
Liquidation Process
If the value of your account drops below the maintenance margin, Perplex will automatically start to liquidate your positions.
This means Perplex will forcefully close your positions to prevent further losses and to repay the borrowed funds used to maintain the margin. The liquidation process uses the remaining balance in your account to cover the losses and any fees associated with the liquidation.
