Risk Management & Liquidation
This guide explains the risks of leverage trading and how liquidation works on Dexetera.
Understanding Risk on Dexetera
Your Money is at Risk
Dexetera is leverage trading. You can lose your entire deposit quickly.
Never trade with money you need for:
- Rent or mortgage
- Food or essential expenses
- Emergency funds
- Money you promised to others
Only trade with:
- Money you can afford to lose
- "Play money" or speculative funds
- Profits from previous trades
- Money you'd be comfortable losing 100% of
Risk Levels by Leverage
1x Leverage (Safest)
Deposit: 100 USDC
Position: 100 USDC
Risk: You only lose what you put in (in theory)
Scenario:
- LONG at $50,000
- Price drops to $0
- Loss: 100 USDC maximum
- Liquidation: Impossible (no leverage)
2-3x Leverage (Moderate Risk)
Deposit: 100 USDC
Position: 200-300 USDC
Risk: Moderate - 10-20% move liquidates you
Scenario (2x):
- LONG at $50,000
- Liquidation at: $40,000 (20% down)
- You lose everything if price drops 20%
Scenario (3x):
- LONG at $50,000
- Liquidation at: $37,500 (25% down)
- You lose everything if price drops 25%
5x+ Leverage (High Risk)
Deposit: 100 USDC
Position: 500+ USDC
Risk: High - 5-10% move liquidates you
Scenario (5x):
- LONG at $50,000
- Liquidation at: $40,000 (20% down)
- You lose everything if price drops 20%
Scenario (10x):
- LONG at $50,000
- Liquidation at: $45,000 (10% down)
- You lose everything if price drops only 10%
Scenario (20x):
- LONG at $50,000
- Liquidation at: $47,500 (5% down)
- You lose everything if price drops just 5%
The Leverage Trap
New traders often think: "5x leverage = 5x profits, I'll be rich!"
Reality:
- 5x leverage = 5x EVERYTHING
- 5x profits YES, but
- 5x losses YES
- And liquidation is just 20% away
How Liquidation Works
What is Liquidation?
Liquidation = Your position is automatically closed when losses get too big.
Why?: To prevent you from owing money to the protocol.
Liquidation Price Calculation
Formula:
Liquidation Price = Entry Price × (1 - 1/Leverage)
Examples:
1x Leverage:
- Entry: $50,000
- Liquidation: $50,000 × (1 - 1/1) = $50,000 × 0 = $0
- (Never liquidates, you only lose what you put in)
2x Leverage:
- Entry: $50,000
- Liquidation: $50,000 × (1 - 1/2) = $50,000 × 0.5 = $25,000
- (50% drop = liquidation)
3x Leverage:
- Entry: $50,000
- Liquidation: $50,000 × (1 - 1/3) = $50,000 × 0.667 = $33,350
- (33% drop = liquidation)
5x Leverage:
- Entry: $50,000
- Liquidation: $50,000 × (1 - 1/5) = $50,000 × 0.8 = $40,000
- (20% drop = liquidation)
10x Leverage:
- Entry: $50,000
- Liquidation: $50,000 × (1 - 1/10) = $50,000 × 0.9 = $45,000
- (10% drop = liquidation)
SHORT Position Liquidation
For SHORT positions, liquidation works in reverse:
SHORT at $50,000 with 5x leverage:
Liquidation Price: $50,000 × (1 + 1/5) = $50,000 × 1.2 = $60,000
If price goes UP to $60,000, you're liquidated
(20% move up = liquidation)
Real-Time Monitoring
Liquidation Indicators
Dexetera shows you in real-time:
- Liquidation Price: The exact price where you get liquidated
- Distance to Liquidation: How far price must move to liquidate you
- "At Risk" Warning: If liquidation price is very close
Example Dashboard
Position: LONG Bitcoin at $50,000
Amount: 100 USDC
Leverage: 5x
Current Price: $48,000
Liquidation Price: $40,000
Distance to Liquidation: $8,000 (16% down)
Your Position Value:
- Entry value: 500 USDC (100 × 5x)
- Current value: 480 USDC (down 20 USDC)
- Unrealized P&L: -20 USDC
- Return: -4%
⚠️ WARNING: Close to liquidation price!
Liquidation Examples
Example 1: 5x Leverage - Bitcoin LONG
Setup:
- Entry price: $50,000
- Deposit: 100 USDC
- Leverage: 5x
- Position value: 500 USDC
- Liquidation price: $40,000
Day 1: Price stays at $50,000
- P&L: 0 USDC ✓
Day 5: Price drops to $45,000
- Loss: 500 × ($50,000-$45,000)/$50,000 = 50 USDC
- Remaining: 50 USDC
- Warning: Price is closer to liquidation
- Distance: $45,000 to $40,000 = $5,000 (11% more down)
Day 10: Price drops to $40,500
- Loss: 500 × ($50,000-$40,500)/$50,000 = 47.5 USDC
- Remaining: 52.5 USDC
- Critical: Very close to liquidation
- ⚠️ ACTION NEEDED: Close position to save remaining funds!
Day 15: Price drops to $39,999
- LIQUIDATED AUTOMATICALLY
- Entire 100 USDC deposit: LOST
- Cannot recover any remaining amount
Example 2: 2x Leverage - Ethereum SHORT
Setup:
- Entry price: $3,000
- Deposit: 50 USDC
- Leverage: 2x
- Position value: 100 USDC
- Liquidation price: $6,000 (double!)
Day 1: Price stays at $3,000
- P&L: 0 USDC ✓
Day 3: Price goes to $4,000
- Loss: 100 × ($4,000-$3,000)/$3,000 = 33 USDC
- Remaining: 17 USDC
- Distance to liquidation: $6,000 - $4,000 = $2,000 (50% more up)
Day 5: Price goes to $5,500
- Loss: 100 × ($5,500-$3,000)/$3,000 = 83 USDC
- Remaining: ~0 USDC (almost wiped out)
- Critical: Liquidation very close!
- ⚠️ CLOSE NOW or get liquidated!
Day 7: Price reaches $6,000
- LIQUIDATED AUTOMATICALLY
- All remaining USDC: LOST
Strategies to Avoid Liquidation
1. Use Low Leverage
Highest protection: 1x leverage
- You never liquidate
- You can only lose what you deposit
- Slower profits but safer
Safe range: 1-3x leverage
- Reasonable profit potential
- Manageable liquidation distance
- Recommended for most traders
Risky: 5x+ leverage
- Should only use if you're experienced
- Must monitor positions constantly
- Can liquidate very quickly
2. Set Stop Losses
Don't wait for liquidation. Close early.
Trade plan BEFORE opening:
- Entry price: $50,000
- Profit target: $52,000 (close here for profit)
- Stop loss: $48,000 (close here to limit loss)
- Liquidation: $40,000 (don't wait!)
If price drops below $48,000:
- Close position immediately
- Save remaining capital
- Avoid bigger losses
3. Position Sizing
Only risk a small percentage per trade
Bad: All-in trading
- Have 1000 USDC
- Put entire 1000 USDC in one trade
- Get liquidated, lose everything
Good: Risk management
- Have 1000 USDC
- Use 50-100 USDC per trade
- Can afford 5-10 losing trades
- Still have capital to recover
4. Monitor Positions Constantly
Especially with leverage:
- Check position multiple times daily
- Set price alerts on contract
- Close if getting close to liquidation
- Don't sleep through a liquidation
5. Use Low Leverage for Volatile Markets
Bitcoin (Volatile): Use 1-2x max
Stable assets: Can use 3-5x
The more volatile the asset, the lower leverage.
What Happens When You're Liquidated
Liquidation Process
- Price reaches liquidation level
- Smart contract detects this
- Your position is closed automatically (you can't stop it)
- Your entire deposit is lost (or remaining balance, whichever is less)
- Position disappears from your account
- Funds are gone (cannot recover)
What You Keep
After liquidation:
- ✓ Your remaining wallet balance (if any leftover)
- ✓ Your other open positions (unaffected)
What you lose:
- ✗ Liquidated position deposit (100%)
- ✗ All potential future profits from that position
Important: Cannot Be Recovered
Liquidation is permanent. Dexetera:
- ✗ Cannot reverse liquidation
- ✗ Cannot refund liquidated amount
- ✗ Cannot appeal or dispute (smart contract is final)
Only prevention: Close position before liquidation happens.
Risk Warnings
Leverage is Dangerous
Statistics (not actual Dexetera data, but typical):
- 1x leverage traders: ~90% don't lose money long-term
- 2x leverage traders: ~70% lose money
- 5x leverage traders: ~95% lose all money eventually
- 10x+ leverage traders: ~99% lose all money
Losses Are Fast
Price action timing:
Without leverage (1x):
- Price drops 20% over 1 week
- You lose 20% slowly
- Time to react: Several days
With 5x leverage:
- Price drops 20% in 1 hour
- You're liquidated (20% = full loss)
- Time to react: Minutes
This is why leverage is dangerous.
Emotional Trading
When you're losing:
- Don't increase leverage hoping to "recover"
- Don't open more positions
- Don't trade emotionally
Close your position, step away, review what went wrong.
Liquidation FAQs
Q: Can I get liquidated with 1x leverage? A: No. 1x leverage means you only lose what you deposit. No liquidation possible.
Q: Will Dexetera warn me before liquidation? A: Yes. "At Risk" warning appears when you're close. But the warning doesn't stop liquidation.
Q: Can I deposit more money to avoid liquidation? A: Depends on Dexetera features. Some protocols allow this, others don't. Check documentation.
Q: What if price liquidates me and then recovers? A: Doesn't matter. Position is closed. You're out. You'd have to re-open (paying fees again).
Q: Is liquidation automatic or manual? A: Automatic. Smart contract does it. You can't stop it.
Q: Do I owe money if liquidated? A: No. You only lose your deposit. You never owe anything (blockchain design).
Next Steps
- Learn trading strategy: Trading Basics
- Understand fees: Fees & Pricing
- Plan your trades: How It Works
Remember: Low leverage = Long-term survival. High leverage = Fast liquidation. Start safe, build skills, then increase leverage gradually if profitable.