Auto-Deleveraging
Auto-deleveraging (ADL) is an emergency mechanism on derivatives platforms. When a liquidated position cannot be closed in the market and the insurance fund cannot cover the loss, the platform automatically closes part of profitable positions on the opposite side to balance the books.
Why ADL exists
Futures and perpetual markets must stay balanced: every long has a matching short. If a large losing position is liquidated in a crash and nobody in the order book will take it at a price that covers the loss, the platform has a deficit. The insurance fund is the first backstop. When that is exhausted or too small for a particular market, ADL is the last line of defense that keeps the exchange solvent without passing losses to everyone.
Who gets deleveraged
Platforms rank opposing traders in an ADL queue. The ranking typically combines how profitable a position is and how much leverage it uses, so highly profitable, highly leveraged positions are picked first. Many exchanges show your queue position with a simple indicator, such as a row of lights.
Positions are closed at the bankruptcy price of the liquidated trader, not necessarily at the current market price. The chosen traders keep the profit up to that point, but their position, or part of it, is closed without their consent.
An example
Say a small altcoin spikes 40 percent in minutes. Several large shorts are liquidated, but the order book is thin and the insurance fund for that contract is small. To close the remaining short exposure, the platform reduces the most profitable, highly leveraged longs. A trader holding a 10x long that was up 400 percent suddenly finds half the position closed. Their profit on that half is locked in, but they lose the exposure they wanted to keep.
What it means for traders
ADL is rare on major contracts but more likely in volatile, illiquid markets. It is especially painful for hedged traders: if one leg of a hedge is closed by ADL, the remaining position is suddenly exposed. Using lower leverage and watching the ADL indicator can reduce the chance of being picked. Read the platform's rules, because the mechanism and its ranking formula differ between exchanges.
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Frequently asked questions
Do I lose money if I am auto-deleveraged?
Not directly. You are closed out at a profit, but you lose the rest of the position and any further gains, and a hedge can become unbalanced.
How do I know if I might be auto-deleveraged?
Many platforms display an ADL indicator for each position showing its place in the queue. Higher profit and leverage raise the ranking.
Is ADL the same as a liquidation?
No. Liquidation closes losing positions; ADL closes part of winning positions on the other side when liquidation and the insurance fund are not enough.
Related terms
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