Understanding the strategy.margin_liquidation_price Function in Pine Script

The strategy.margin_liquidation_price function in Pine Script is a pivotal feature for traders who utilize margin in their trading strategies. This function calculates the price at which a margin call would occur, potentially leading to the liquidation of enough of the position to satisfy margin requirements. It’s especially useful for managing risk in trading strategies that involve leverage.

Type

• Return Type: series float

Example

//@version=5
strategy("Margin Call Strategy", overlay = true, margin_long = 25, margin_short = 25, 
  default_qty_type = strategy.percent_of_equity, default_qty_value = 395)

float quickMA = ta.sma(close, 14)
float slowMA = ta.sma(close, 28)

if ta.crossover(quickMA, slowMA)
    strategy.entry("GoLong", strategy.long)

if ta.crossunder(quickMA, slowMA)
    strategy.entry("GoShort", strategy.short)

priceChangePercent(changeFrom, changeTo) => 
    float result = (changeFrom - changeTo) * 100 / math.abs(changeTo)

// Exit strategy to prevent margin call when price is within 10% of the liquidation price.
if math.abs(priceChangePercent(close, strategy.margin_liquidation_price)) <= 10
    strategy.close("GoLong")
    strategy.close("GoShort")

Remarks

• The function returns na (not applicable) if the strategy does not use margin, which is determined by the absence of margin_long or margin_short parameters in the strategy’s declaration statement.

Deep Dive into the Example Code

1. Strategy Initialization: The strategy function initializes the trading strategy, named “Margin Call Strategy”, with both long and short margin requirements set at 25%, and positions based on a percentage of equity (395%).
2. Moving Averages: Two simple moving averages (SMAs) are calculated, named quickMA and slowMA, with periods of 14 and 28, respectively. These serve as indicators for the strategy’s entry points.
3. Entry Conditions: The strategy enters a long position (GoLong) when quickMA crosses over slowMA, and enters a short position (GoShort) when quickMA crosses under slowMA.
4. Margin Call Avoidance Logic: The priceChangePercent function calculates the percentage change between the current close price and the margin liquidation price. If this value is within 10% (either direction), the strategy preemptively closes both long and short positions to avoid a margin call.

Key Features and Takeaways

• Function Purpose: Enables strategies to account for and react to margin requirements dynamically, enhancing risk management.
• Useability: Applies to strategies utilizing margin trading, providing a critical risk management tool.
• Syntax and Application: Requires the strategy to specify margin parameters (margin_long and margin_short) to be applicable. It is used within conditional statements to manage open positions based on the proximity to liquidation price.
• Strategic Application: By incorporating the strategy.margin_liquidation_price function, traders can create strategies that automatically adjust to avoid margin calls, potentially saving the account from significant losses.

This example demonstrates the practical use of the strategy.margin_liquidation_price function in Pine Script to manage and mitigate the risks associated with margin trading.