About Liquidation Price Calculator (Formula)
A Liquidation Price Calculator is a financial tool used in trading and investment to determine the price at which a trader’s or investor’s position will be liquidated or closed to prevent further losses. It is commonly used in margin trading and leveraged positions, where traders borrow funds to increase their trading capital. The formula for calculating the liquidation price (LP) is based on the trader’s entry price, leverage, and the maintenance margin requirement and is as follows:
Liquidation Price (LP) = Entry Price (EP) / (1 – Maintenance Margin (MM))
Where:
- Liquidation Price (LP) is the price at which the position will be liquidated to prevent further losses.
- Entry Price (EP) is the price at which the trader entered the position.
- Maintenance Margin (MM) is the percentage of the position’s value that must be maintained as collateral to avoid liquidation.
In this formula, the trader’s entry price is divided by the difference between 1 and the maintenance margin as a decimal to calculate the liquidation price. If the market price falls to or below this liquidation price, the trader’s position is automatically closed to limit potential losses and protect the capital.
Liquidation Price Calculators are essential tools for traders, particularly those involved in leveraged trading, such as cryptocurrency trading or futures trading. These calculators help traders manage risk by setting stop-loss levels and understanding the price points at which their positions may be liquidated, helping them make informed trading decisions and protect their investments.