Definition

Liquidation occurs when a leveraged trading position is forcibly closed because margin requirements are no longer met. This typically happens when losses exceed available collateral in the account.

Liquidation protects exchanges or counter-parties from further exposure when account equity falls below maintenance thresholds.

Example in Context

A trader opens a leveraged position, and the market moves sharply against them. When account equity falls below the required maintenance margin, the position is automatically liquidated.

FAQs

Can liquidation happen quickly?

Yes. In volatile markets, rapid price movements may trigger liquidation.

Does liquidation affect the entire account?

Under cross-margin, it may impact total account equity. Under isolated margin, only the allocated margin is affected.

Can liquidation be avoided?

Risk management practices such as lower leverage or stop-loss orders may reduce the likelihood, but liquidation risk cannot be eliminated.

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