Leverage and Liquidations

Tip: If you’re new to margin trading, start with lower leverage. Watch your margin ratio closely and consider using stop-loss orders to manage downside risk.

Leverage Overview

What is Leverage?

Leverage is the ratio of your position size to the collateral you deposit.

  • For example, depositing $100 to open a $500 position is $500 / $100 = 5x leverage.

Key Points

  • Higher Leverage = Higher Risk: Even small price changes can cause large profits or losses.

  • Borrowing Fees: With larger positions, borrowing fees accumulate faster.

  • Liquidation Threshold: Higher leverage reduces the price cushion before forced liquidation.

How to Set Leverage

  1. Open a Trade: Select your desired leverage (e.g., 3x, 5x, 100x) in the Sai UI.

  2. Review Position Size: Confirm the total notional value of your trade.

  3. Check Liquidation Price: The UI estimates your liquidation price; higher leverage brings the liquidation price closer to the current market price.

  4. Update Leverage Later: By adding or removing collateral, you can increase or decrease your effective leverage.

Note: Every increase in leverage comes with greater exposure to market swings and potentially higher borrowing fees.

Leverage Examples

  • Example A (High Leverage)

    • Collateral: $200

    • Leverage: 5x → Position Size = $1,000

    • A 10% price rise yields roughly a $100 profit (50% gain on collateral). A 10% price drop results in a $100 loss (50% loss on collateral).

  • Example B (Lower Leverage, More Cushion)

    • Collateral: $200

    • Leverage: 2x → Position Size = $400

    • A 10% price drop is a $40 loss (20% of your collateral). Lower leverage means more room before liquidation.

Adjusting Leverage Mid-Position

  • Add Collateral: Lowers your effective leverage, providing a bigger buffer against liquidation.

  • Remove Collateral: Increases leverage, exposing you to higher risk if the market continues to move against you.

Liquidation Mechanics

What is Liquidation?

A liquidation automatically closes your position when your collateral can’t cover potential losses. This protects both your remaining capital (if any) and the protocol from a negative balance.

Liquidation Threshold

SAI uses a maintenance margin requirement, typically a small portion of your initial margin (e.g., 10%).

  • If your total equity (PnL + Collateral) falls below this maintenance margin, your position becomes eligible for liquidation.

  • The SAI interface normally displays a liquidation price to show where you’d be at risk of forced closure.

Example:

  • $100 collateral at 5x leverage = $500 position. If maintenance margin is $10, your position can only lose $90 before liquidation is triggered. A price drop beyond that threshold triggers forced closure.

The Liquidation Process

  1. Trigger: If your margin ratio dips below the safe threshold, a keeper (liquidator) can call Trigger Trade to forcibly close your position at the current market price.

  2. Close the Position: The system sells (or covers) your position.

  3. Distribute Remaining Collateral: After covering losses and fees, any leftover collateral is returned to you. If losses exceed your collateral, you lose most or all of your margin.

Avoiding Liquidations

  1. Use Lower Leverage: Lower leverage gives you a wider price cushion.

  2. Add Collateral: If the market moves against you, extra funds reduce your liquidation risk.

  3. Set a Stop-Loss: Stop-loss orders let you exit earlier, often preventing liquidation and limiting losses.

  4. Monitor Borrowing Fees: Accumulated fees can reduce your available margin and move you closer to liquidation.

Pro Tips

  1. Mind Volatility: High volatility can cause rapid price swings—be extra cautious with high leverage.

  2. Watch Borrowing Fees: Fees accumulate over time, gradually eating into your collateral.

  3. Act Preemptively: If you see your margin ratio dropping, adding collateral or closing part of the position can prevent a forced liquidation.

  4. Track the “Est. Liquidation Price”: If the market price moves close to this value, you’re at high risk.

5. FAQ

Q: What is the maximum leverage I can use in SAI? A: Each market (e.g., BTC-PERP, ETH-PERP) has its own max leverage, displayed in the UI. Values like 10x, 20x, or 50x depend on that market’s risk parameters.

Q: How do I know if I’m near liquidation? A: Check your margin ratio and the displayed liquidation price in the position details. If the market price is near or past the liquidation price, a forced close can happen any moment.

6. Next Steps

  1. Try a Test Market: Practice opening a small leveraged trade to observe how price changes affect your margin and PnL.

  2. Read About Order Types: Learn about limit orders, stop-losses, or advanced order types if SAI supports them, to manage risk.

  3. Join the Community: Have more questions? Need live support? Join our Discord to connect with other traders and the SAI team.

Trade responsibly, and best of luck with Sai!

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