Auto Deleveraging is a way of closing trades by skipping the Uniswap pool and closing the trade against a counterparty trade on Futureswap. Many measures have been taken to ensure that ADL occurs as infrequently as possible. Trades that get ADL'd will most times receive a large market premium on their close price to compensate (details).
A 10 ETH long trade needs to close and for whatever reason cannot close on Uniswap(ex: there isn't enough FS liquidity to send to Uniswap for the trade). If 10 short ETH were also closed out to match the closing 10 ETH long then this is a valid change.
FS LPs have not gained or lost any exposure without swapping in Uniswap. As you can imagine, this was not an optimal situation for the short that got forced closed by the long(although they may have been nowhere close to their liquidation price). ADL matches a closing trade with the highest leverage counterparty. Closing long trades will ADL the most leveraged short trades and closing shorts will ADL long trades.
Trades are placed into risk tranches(buckets) when they are opened. For example 0-5x, 5-10x... 100-105x leverage. ADL starts closing trades by the highest leverage tranche and works it's way down until enough asset has been closed.
To greatly lower the odds of being ADL'd you can trade with lower leverage (0-5x or 5-10x). The lower the less likely you will receive and ADLing.
Traders will need to watch out for having part of their trades unexpectedly closed on them by ADL. The smart contracts emit an event when ADL occurs:
uint8 indexed trancheId,
uint64 indexed shareClass
To compensate traders for the inconvenience of being ADL’d, they will most times (in the case of liquidations) receive a better price than if they closed it on the open market themselves. Example: A long trade get's liquidated at ETH $100 but had collateral to cover till ETH $98. If this trade causes shorts to get ADL'd the shorts that were forced closed would close at $98 instead of the fair $100 profiting an additional 2%. There is a potential trading strategy, where you could have very leveraged, balancing longs and shorts open hoping one side gets ADL'd at a much better price than market. If a 50x gets ADL'd at a 2% premium, that would be around a ~ 100% profit.