What is the Auto-Deleveraging (ADL) Mechanism?
When extreme market volatility causes certain users' positions to be forcibly liquidated, and the system is unable to close the positions at a reasonable market price, while the insurance fund is insufficient to cover the losses, the Auto-Deleveraging (ADL) mechanism will be triggered.
Once ADL is triggered, some users holding positions in the opposite direction will be automatically deleveraged. The system ranks users based on their leverage and profitability, prioritizing those with higher profits and higher leverage for deleveraging.
Auto-Deleveraging Ranking Rules
The system calculates the priority of deleveraging using the following formulas:
- For profitable accounts: Ranking = Profitability Ratio × Effective Leverage
- For loss-making accounts: Ranking = Profitability Ratio ÷ Effective Leverage
Where:
- Profitability Ratio = Unrealized P&L / (Total Initial Margin + Total Added or Reduced Margin)
- Total Initial Margin = Position Size / Average Entry Price
Users with a higher ranking will be prioritized for deleveraging when the ADL mechanism is activated.
Auto-Deleveraging (ADL) vs. Bankruptcy Loss Sharing
- Bankruptcy Loss Sharing: On some trading platforms, when a liquidated account’s losses exceed what the insurance fund can cover, a portion of profitable users’ earnings is deducted proportionally to cover the losses, usually executed during settlement.
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Auto-Deleveraging (ADL): Echobit adopts the ADL mechanism to reduce risk exposure through automatic liquidation. Unlike bankruptcy loss sharing, profitable users can withdraw their earnings at any time without additional deductions.
How to Reduce the Risk of Auto-Deleveraging?
- Lower Your Leverage: Higher leverage increases potential profits but also makes you more likely to be selected for auto-deleveraging.
- Manage Your Positions Wisely: Maintain sufficient margin to enhance your account’s risk tolerance.
- Monitor Market Volatility: Adjust your positions proactively during high market volatility to avoid disruptions caused by auto-deleveraging.
Thank you for choosing Echobit. We will continue to provide you with an efficient and secure trading experience!
Echobit Team