Leverage and Liquidation

What is Leverage?

Traders can use leverage to control larger positions with less capital. For example, 2x leverage allows a $2,000 position with just $1,000. Rails offers 1x to 5x leverage, provided you have sufficient balance.

Higher leverage increases both potential gains and risks. Ensure your available balance covers the required collateral; otherwise, you cannot open a trade. If unrealized Profit & Loss (P&L) reaches your balance, your position will auto-liquidate.

Rails uses cross leverage. This means leverage is applied at the account level, not the trade level. Therefore all open positions must use the same leverage until all are closed.

How Does Liquidation Work?

When you trade with leverage, your position can be liquidated if the market moves against you. Your liquidation price (the index price at which your position will be liquidated) is the maximum absolute index price permitted to maintain a non-negative account balance. This can be viewed in the Position tab on the main Trade page as shown below.

Liquidation happens automatically if your position moves against you faster than you can add funds. To help protect your balance, consider setting trigger orders.

How is the Liquidation Price Calculated?

The liquidation price is calculated slightly differently for Long and Short positions as shown here:

$$\text{Liquidation Price}_{\text{long}} = \text{Average Price} \times \left( 1 - \left( \frac{1}{\text{Account Leverage}} \right) + \text{Safety Margin} \right)$$

$$\text{Liquidation Price}_{\text{short}} = \text{Average Price} \times \left( 1 + \left( \frac{1}{\text{Account Leverage}} \right) - \text{Safety Margin} \right)$$

Where:

• $\text{Average Price}$ is the average entry price of the orders used to fill your position.

• $\text{Account Leverage}$ is the actual leverage used when you opened your positions, not the leverage you selected when placing your trade. It is determined using the sum of all open position balances and the account balance from the Account Summary.

$$\text{Account Leverage}=\max\left( \frac{\text{Total Positions}}{\text{Total Account Balance}}, 1 \right)$$

• $\text{Safety Margin}$ is a standard 3% buffer which is added to account for market volatility and slippage. It is the minimum margin requirement which helps prevent negative account balances.

$$\begin{align*} \text{Safety Margin} &= \text{Transaction Fee} + \text{Liquidation Fee} + \text{Slippage Buffer} \\ &= 0.1\% + 1\% + 1.9\% \\ &= 3\% \end{align*}$$

Frequently Asked Questions

Why does my order have a liquidation price if I am not using leverage?

Since there is a safety net (3% safety margin), even if you open a position with 1x cross-leverage (i.e. no leverage) you will still see a liquidation price. This is in place to ensure your account balance does not go into the negative if the market moves very quickly causing slippage (the difference between the expected price of a trade and the actual price it is executed at).

Why did my liquidation price change?

The liquidation price is based off of your available balance which changes as you open and close trades. If you open a new position, the liquidation price will move closer to the entry price as the available balance decreases, increasing the risk of liquidation if the market moves unfavourably. Conversely, if you close a different position with a positive P&L, your liquidation price for any remaining positions will move further away from the entry price as the risk of liquidation decreases.

Deposits and withdrawals to your account affect your collateral and impact your margin therefore changes to the funds available in your account have a direct impact on your liquidation price. A deposit into your account will increase your available balance and push your liquidation price further away. Reduced collateral will have the adverse affect and bring your liquidation price even closer to your entry price.

How do I avoid liquidation?

Liquidation occurs when your available balance falls below the maintenance margin required to keep your open positions. At Rails, we use cross-margin and leverage, meaning your liquidation price is directly affected by both your total your account equity and size of all positions.

To protect yourself and avoid forced liquidation, there are two key strategies:

1. Set up a stop loss trigger order, which will close your position at a predefined price if the market moves against you. This helps limit your losses before reaching the liquidation threshold.

2. Increase your collateral by depositing more funds into your account. This lowers your effective leverage and moves the liquidation price further away.

Why is the leverage used to determine the liquidation price different from what I selected when I placed my order?

The leverage you select when using the order panel determines your buying power (leverage x available balance). However, the effective leverage (the actual leverage used when opening a position) is calculated as follows:

$\text{Effective Leverage} = \frac{\text{Total Position Value}}{\text{Total Available Balance}}$

The effective leverage may vary from your selected leverage due to several factors:

1. Price Changes: The entry price may differ slightly between placing the order and its execution due to market movements.

2. Fees: Trading fees are deducted from your available balance, reducing the amount that can be leveraged.

3. Margin Requirements: A portion of your balance is reserved as margin to cover potential slippage or adverse price movements, impacting the effective leverage applied.

Since leverage is calculated as a function of position size and available balance, these adjustments to your balance and the actual position size can result in the effective leverage being slightly different from the leverage you initially selected.

How do I avoid liquidation

Liquidation occurs when your available balance falls below the maintenance margin required to keep your open positions. At Rails, we use cross-margin and leverage, meaning your liquidation price is directly affected by both your total your account equity and size of all positions.

To protect yourself and avoid forced liquidation, there are two key strategies:

1. Set up a stop loss trigger order, which will close your position at a predefined price if the market moves against you. This helps limit your losses before reaching the liquidation threshold.

2. Increase your collateral by depositing more funds into your account. This lowers your effective leverage and moves the liquidation price further away.

What is the safety margin, and why is it 3%?

The safety margin is a key component of determining the liquidation price. It accounts for all fees that would be charged in the event of the position closing as well as a buffer to account for slippage. This is standard to avoid customer account balances going into the negative.

The safety margin is static for all users and is calculated as follows:

• $\text{Safety Margin} = 3\% = \text{Liquidation Fee} + \text{Transaction Fee} + \text{Slippage Buffer}$

Where:

• $\text{Liquidation Fee}$ is a 1% standard fee charged to compensate for taking on the risk of managing high risk transactions and to incentivize responsible trading.

• $\text{Transaction Fee}$ is a 0.1% standard fee charged for all open and closed positions on the platform.

• $\text{Slippage Buffer}$ is an additional allowance to account for rapidly shifting index prices which may negatively impact trade completion. It is set at 1.9%.