What is liquidation in trading?
In one line: Liquidation is when a broker or exchange closes your leveraged trade for you, because your losses have used up the margin backing it.
A simple example
You open a $2,000 long crypto trade at 10x Leverage, posting $200 as margin.
A 10% drop wipes out $200, your whole margin. The exchange won't wait that long. It keeps a small maintenance buffer and closes the trade a little earlier, say around a 9% drop.
That forced close is liquidation. You lose about the $200 margin, plus fees. A math example, not a forecast.
How leverage moves it closer
Rough distance to liquidation for a long trade, before buffers and fees:
| Leverage | Price move that wipes the margin |
|---|---|
| 2x | about 50% |
| 5x | about 20% |
| 10x | about 10% |
| 50x | about 2% |
At 50x, a normal hourly swing can be enough. Check your own numbers with the crypto liquidation calculator.
Where you'll see it
- Crypto futures and perpetuals: liquidation is triggered by the mark price, not the last trade.
- Forex and CFDs: often called a "stop out" when your margin level falls below the broker's limit.
- Stock and futures margin: a Margin call first, then forced selling if it isn't met.
Why it matters
Liquidation isn't a plan. It's the platform protecting itself. It usually closes you out at the worst moment, often in a fast move where many traders are being closed at once. That can make price move even further.
A common mistake
Using liquidation as your stop loss. If liquidation is the only exit, every loss is the biggest possible loss for that trade.
Set a real Stop loss from the chart, then size the trade so the stop costs about 1% of the account. Liquidation should sit far beyond your stop, as a backstop you never reach.
How isolated margin and cross margin change what you can lose is worth reading next, along with crypto leverage and perpetuals.
Questions
Can you lose more than your margin when liquidated?
On most crypto exchanges, losses are capped at your margin through insurance funds. With some brokers and in fast markets, losses can exceed your deposit. Check your platform's rules.
What is a liquidation price?
The price at which the platform will force-close your position. It's shown on most crypto exchanges when you open a leveraged trade.
How do I avoid liquidation?
Use lower leverage, a real stop loss, and small position size. Those keep liquidation far from where your trade normally moves.
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