Auto deleveraging (ADL) takes place when a series of adjustments, like liquidation, are unsuccessful in maintaining a positive margin. It is important to understand what happens with an ADL, even if it is something everyone wants to avoid.
This article will help you understand auto deleveraging in futures contracts. To know more about futures trading on our exchange, you can refer to our BTSE Futures tutorial.
Auto Deleveraging: What Does It Mean?
Auto deleveraging, or ADL, is the last resort – before reaching this point, the exchange will try to liquidate your position at the liquidation price. But if the position cannot be liquidated before reaching the bankruptcy price due to high market volatility, then auto deleveraging will occur and you lose all your collateral.
Let’s take a look at this process more closely.
What Happens Before ADL Occurs
As mentioned, auto deleveraging is the last possible option to avoid traders reaching a margin below zero. It all starts with an unsuccessful trade. If you have a long position and the price of the contract starts falling, or if you have a short position and the price rises, your trade loses.
If with these kinds of positions you use leverage, your margin – that is, the part of your capital used as collateral – would start losing value, and the higher the leverage the more margin you lose.
When the margin is no longer sufficient to support the positions you opened, the liquidation price is triggered. If BTSE is not able to close your position at the liquidation price, then it will be closed at the bankruptcy price – when your balance is zero – and ADL will be triggered.
How Does ADL Work?
Remember that using leverage is like using borrowed money? This is how you can access a higher capital than the one you really own.
BTSE has an insurance fund set up to make sure that if a trader is not able to return the borrowed money, the exchange will continue to work for all the other traders. Drawing on the fund is what the platform does to prevent you from having a lower-than-zero balance.
When ADL occurs, the positions of opposite traders are automatically deleveraged to allow the platform to maintain a healthy level of liquidity.
Every trader can see the ADL level of every open position below the chart on the BTSE Futures platform – the more bars, the higher the possibility to be deleveraged.
Those who are collecting higher profits are deleveraged first, but in this case, traders can also control their ADL level by increasing their margin.
Takeaways
This article has covered ADL, a very useful mechanism put in place to ensure healthy liquidity on BTSE’s futures market and help traders avoid a negative balance.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.
