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Liquidation

The automatic closing of a leveraged position when losses exceed the margin, resulting in partial or total loss of collateral.

What is Liquidation?

Liquidation occurs when a trader's leveraged position is forcibly closed by the exchange because the account no longer has sufficient margin to maintain the position. This happens when the market moves against the trader beyond a certain threshold.

How Liquidation Works

When you open a leveraged position, you deposit collateral (margin) as security. If the market moves against you:

  1. Maintenance Margin: Your position requires a minimum margin level
  2. Liquidation Price: The price at which your margin falls below the required level
  3. Forced Closure: The exchange automatically closes your position to prevent further losses

Liquidation Price Calculation

For a long position with 10x leverage:

  • Entry: $100,000
  • Margin: $10,000 (10%)
  • Approximate liquidation: ~$90,000 (varies by exchange)

Higher leverage = liquidation price closer to entry = higher risk.

Why It Matters

  • Risk Management: Understanding liquidation helps set appropriate stop-losses
  • Market Impact: Mass liquidations can cause cascading price movements
  • Liquidation Data: Tracking liquidations reveals market sentiment and leverage levels

Avoiding Liquidation

  1. Use lower leverage
  2. Set stop-loss orders before liquidation price
  3. Monitor positions actively
  4. Keep additional margin available