Liquidation
Liquidation occurs when a leveraged trading platform forcibly reduces or closes a position because the trader no longer has enough margin to satisfy the required maintenance margin.
✦ Key Insight
Liquidation is one of the biggest risks of leveraged crypto trading. A spot investor can usually continue holding an asset after a sharp decline. A highly leveraged futures trader may have the position automatically closed long before the asset reaches zero. Liquidations can also influence the broader market by creating forced buying or selling.
✕ Common Misconceptions
Using excessive leverage
Treating the displayed liquidation price as permanently fixed
Ignoring mark price
Adding margin repeatedly to losing trades
Assuming stop losses guarantee execution before liquidation
Confusing liquidation with an ordinary voluntary sale
Detailed Explanation
How It Works
A trader opens a leveraged position using margin.
If the market moves against the position:
Unrealised losses increase.
Available margin declines.
The position approaches its liquidation threshold.
The exchange's liquidation system intervenes.
Part or all of the position may be closed.
Long liquidations generally involve forced selling.
Short liquidations generally involve forced buying.
FAQs
Does liquidation mean losing the entire account?
Not necessarily. It depends on position structure and margin mode.
Can liquidation prices change?
Yes.
Can liquidations move the market?
Large clusters of forced closures can contribute to rapid price movements.
In Practice
Dig Deeper
Margin
Margin is the collateral a trader provides to open and maintain a leveraged trading position. It is not the same as the total value of the position.
Liquidation Heatmap
A liquidation heatmap is a visual tool that estimates price areas where large numbers of leveraged positions may be liquidated.