Liquidation Guide
Liquidation is the mechanism that closes a leveraged position when its losses approach the size of the collateral backing it. Understanding exactly how it works — and how to avoid it — is essential before opening any leveraged position.
What Is Liquidation?
When you open a leveraged position, you deposit collateral (margin) that covers a fraction of the total position size. The rest is provided by leverage. If the market moves against you and your unrealized losses erode your margin to a critical level — the maintenance margin — your position is automatically closed by the system. This forced closure is called liquidation.
Liquidation is not a penalty — it is a protective mechanism designed to prevent your account balance from going negative. However, it does mean your entire margin for that position is lost. In fast-moving markets, liquidation can happen in seconds.
How Liquidation Price Is Calculated
Polymargin calculates liquidation prices using standard perpetual futures mechanics adapted for prediction market prices (which range from 0¢ to 100¢).
Long (Buy Yes)
liqPrice = entry × (1 − 1/leverage + MMR)
MMR = maintenance margin rate (0.5% default). The long liquidates when price falls to this level.
Short (Buy No)
liqPrice = entry × (1 + 1/leverage − MMR)
The short liquidates when price rises above this level (i.e., the Yes outcome gains probability).
Worked Example — Long at 50¢, 10× Leverage
A drop from 50¢ to 45.25¢ — just 4.75 cents — triggers liquidation and total loss of margin.
Margin Health Indicator
The Margin Health bar in the trade panel shows how far your current position is from liquidation. It is calculated as:
marginRatio = maintenanceMargin / currentEquity
A health of 100% means your position is freshly opened with full buffer. As price moves against you, health decreases. When it approaches 0%, liquidation is imminent.
Comfortable buffer above maintenance margin.
Monitor closely. Consider reducing size or adding margin.
High liquidation risk. Act immediately.
Cross vs. Isolated Margin
Polymargin supports two margin modes, selectable in the trade panel.
Isolated Margin
Only the collateral explicitly allocated to this position is at risk. If the position is liquidated, you lose that collateral and nothing more. Useful for limiting downside on high-conviction but risky trades.
Cross Margin
Your full available balance is used as collateral across all open positions. This gives positions more runway before liquidation, but a single bad position can affect others. Better for hedgers managing multiple correlated positions.
Take Profit and Stop Loss
The trade panel allows you to set TP and SL levels before opening a position. These are displayed as overlaid dashed price lines on the chart — blue for entry, green for TP, orange for SL, and red for liquidation level.
Setting a stop-loss above your liquidation level is the single most effective way to limit losses. A well-placed stop-loss ensures you exit with a predictable partial loss rather than waiting for liquidation to take everything.
How to Avoid Liquidation
The most reliable protection against liquidation is to use less leverage. Lower leverage means a larger price move is required before liquidation triggers, giving you more time to react. As a rule of thumb, if the market needs to move more than 20% against you to liquidate — that is a more manageable position size than one where a 5% move wipes you out.
Additional practices that reduce liquidation risk: always set a stop-loss, monitor the Margin Health indicator regularly, avoid opening maximum leverage positions in thin or highly volatile markets, and be especially cautious in the 24 hours before a market resolves — prices can move to 0 or 100 rapidly as results become known.
Quick Reference
Max leverage: 20×
Maintenance margin rate: 0.5%
Price range: 0¢ – 100¢
Liquidation warning threshold: 40% margin health
Liquidation trigger: ~0% margin health