What is ADL and How Does it Work?

[Estimated Reading Time: 3 mins]

This article explains Auto-Deleveraging (ADL), a risk management mechanism used in cryptocurrency trading to protect market stability during extreme volatility. ADL is commonly used in derivatives trading to handle cases where a trader's position cannot be liquidated at a price better than the bankruptcy price, ensuring counterparty risk is minimized.

What is ADL and Why Does it Exist?

Auto-Deleveraging (ADL) is a risk management mechanism used in futures trading to handle liquidated positions that cannot be fully resolved through market orders or the insurance fund. During periods of extreme market volatility, liquidation losses may exceed the collateral deposited by the liquidated trader. When this occurs, and the insurance fund is insufficient to cover the shortfall, ADL steps in to ensure market stability.

ADL works by transferring the liquidated position to profitable traders based on their leverage and profitability rankings. This ensures that such positions are absorbed efficiently, maintaining fairness and stability within the trading ecosystem.

How does ADL Work?

1. Triggering ADL: ADL occurs when a trader's position is liquidated and the bankruptcy price cannot be reached due to insufficient market liquidity or extreme volatility.

2. Ranking System: Traders are ranked based on leverage usage and unrealized profitability. Higher-leverage positions and those with higher unrealized profits are prioritized for auto-deleveraging.

3. Deleveraging Mechanism: The system automatically reduces positions from traders on the opposite side of the market to offset the risk.

4. Position Notification: Affected traders receive a notification detailing the amount reduced, the remaining position, and the price at which ADL occurred.

How to Check ADL on IMBX website?

1. Navigate to the Futures Trading section.

2. In the Positions tab, look for the ADL Indicator Bar next to your open positions.

3. The ADL Indicator Bar displays your current ranking:

• Green: Low likelihood of being auto-deleveraged.
• Red: High likelihood of being affected by ADL.

After ADL is triggered, users will receive email notifications with details about the affected positions and the prices at which ADL was executed. Additionally, users can navigate to the Transaction History page on IMBX to review specific orders tagged with "ADL" for a detailed breakdown of the adjustments.

How to Minimize the Risk of ADL?

• Lower Your Leverage: High leverage increases your ranking priority for ADL. Using moderate leverage reduces this risk.
• Diversify Positions: Spread your positions across multiple markets to reduce the impact of ADL on a single trade.
• Monitor ADL Indicators: Regularly check the ADL Indicator Bar to track your ranking and adjust your strategy if you are in the red zone.
• Use Risk Management Tools: Set stop-loss orders and manage position sizes to avoid overexposure.

FAQs

1. What triggers Auto-Deleveraging (ADL)?
ADL is triggered when a liquidated position cannot be closed at the bankruptcy price due to market conditions like low liquidity or extreme volatility.

2. How does ADL affect my open positions?
If your position is ranked for ADL based on leverage and unrealized profitability, part or all of your position may be reduced to offset the liquidated position.

3. How will I know if ADL impacts my position?
You will receive a notification detailing the amount reduced, the remaining position, and the price at which the ADL was executed.

4. Can I prevent my position from being affected by ADL?
You can reduce your risk of being affected by ADL by using lower leverage, maintaining adequate margin, and avoiding highly volatile market conditions.

5. Is ADL the same as forced liquidation?
No, ADL is a separate mechanism that activates only when a liquidated position cannot be fully closed through the normal liquidation process. It acts as a last resort to maintain market stability.

Disclaimer and Risk Warning

All trading tutorials provided by IMBX are for educational purposes only and should not be considered financial advice. The strategies and examples shared are for illustrative purposes and may not reflect actual market conditions. Cryptocurrency trading involves significant risks, including the potential loss of your funds. Past performance does not guarantee future results. Always conduct thorough research, understand the risks involved. IMBX is not responsible for any trading decisions made by users.