Why do traders need the mark price and how does it prevent liquidation

Risk management is the foundation of successful cryptocurrency trading, especially when it comes to margin trading with leverage. One of the key tools for protecting your position is a proper understanding of the marking price mechanism. This indicator helps traders avoid unexpected forced liquidations and make more informed decisions when opening and closing trades.

Why the marking price is more important than the last transaction price

At first glance, it may seem that the last transaction price is a sufficient reference point for a trader. However, this is not the case. The marking price is calculated quite differently and provides a much more reliable picture of the actual market condition.

While the last transaction price depends solely on the most recent trade (which can be the result of manipulation or a local spike in activity), the marking price considers the average value of the asset’s prices across multiple trading platforms simultaneously. This makes the indicator much more resistant to short-term fluctuations and manipulations.

Exchanges have recognized this difference and now use the marking price specifically for calculating margin ratios and determining forced liquidation points. This protects users from unjust losses due to technical failures or artificial fluctuations.

How the marking price is calculated

The calculation formula consists of two components:

Marking Price = Spot Index Price + EMA (Basis)

Or an alternative version:

Marking Price = Spot Index Price + EMA [(Best Bid + Best Ask) / 2 – Spot Index Price]

To understand this formula, it’s necessary to grasp each element:

• Spot Index Price — the average cost of the asset calculated from data across several platforms simultaneously. This eliminates the influence of a single exchange on the overall valuation.

• EMA (Exponential Moving Average) — a technical indicator that tracks price changes over a specified period. EMA gives more weight to recent data rather than averaging all points evenly.

• Basis — the difference between the current spot price and the futures contract price. It shows how the market values the future worth of the asset relative to its current price.

• Best Bid — the highest price a buyer is willing to pay for the asset at the moment.

• Best Ask — the lowest price a seller is willing to accept for the asset.

The purpose of this multi-level calculation is simple: to smooth out abnormal price spikes and provide traders with a stable reference.

Practical application: three ways to protect your position

Setting an exact liquidation level

Before opening a margin position, a trader should understand at what price level their position will be forcibly closed. Using the marking price instead of the last transaction price allows for a more precise liquidation level, taking into account overall market sentiment. This provides an additional buffer against short-term volatility.

Proper placement of stop-loss orders

Many experienced traders make the mistake of placing stop-loss orders based on the last transaction price. Instead, they should use the marking price. For long positions, the stop-loss is placed slightly below the liquidation marking price; for short positions, slightly above. This approach ensures the position is closed before reaching a critical level.

Using limit orders at key levels

Placing limit orders at marking price levels allows for automatic opening of positions at optimal times, synchronizing entry with technical analysis. This helps avoid missing advantageous entry points.

How the marking price and market price differ in action

Imagine a scenario: the last transaction price suddenly drops due to a large order, but the marking price remains almost unchanged. In this case, the position will not be liquidated because the system relies on the marking price. However, if the system calculated risk based on the last price, an unnecessary liquidation would occur.

This is one of the reasons why professional platforms have switched to using the marking price system for margin calls and liquidations.

Risks and limitations of the marking price

Despite its advantages, the marking price is not a panacea. During periods of extreme volatility, when prices move unpredictably fast, even the marking price may not save a position. A trader might simply not have time to close the trade before liquidation.

Furthermore, over-reliance solely on this tool and neglecting other risk management methods is a dangerous strategy. Professionals combine multiple approaches: analyzing support and resistance levels, using technical analysis, and diversifying their portfolio.

Key takeaways about the marking price

The marking price is a weighted average of the asset’s price across multiple platforms, which takes into account the moving average of the basis. This provides a more objective view of the derivative’s value than the last transaction price.

Using the marking price for calculating margin ratios protects traders from unjustified liquidations caused by price manipulation on a single platform. It enables more balanced decision-making when setting liquidation levels, placing stop-loss orders, and opening positions via limit orders.

Mastering this tool is a step toward more conscious and protected cryptocurrency trading.