What is Liquidation?

Liquidation occurs when a leveraged trading position is automatically closed by the exchange because the trader's margin is insufficient to maintain the position. This happens when losses accumulate to a point where the maintenance margin requirement can no longer be met.

Key Points

Trigger Conditions

• Margin falls below maintenance requirement
• Market moves against position beyond liquidation price
• Insufficient funds to maintain leverage ratio

Prevention

• Using appropriate position sizes
• Setting stop-loss orders
• Maintaining adequate margin
• Monitoring positions regularly

Impact

Liquidations can have significant effects on the market:

• Large liquidations can cause price cascades
• Multiple liquidations may trigger chain reactions
• Can create opportunities for experienced traders

Related Terms

• Leverage
• Margin Trading
• Liquidation Price
• Stop Loss