Definition
Liquidation occurs when an exchange automatically closes a trader’s position because losses have reached a level where the trader can no longer meet margin requirements. Liquidation is most commonly associated with leveraged and margin trading. When the market moves against a trader’s position, the exchange may liquidate the position to prevent further losses and recover borrowed funds.
Simple Explanation
Liquidation happens when a leveraged trade is automatically closed because losses become too large.
Example
A trader using 20x leverage is liquidated after a sharp market decline.
Why It Matters
Liquidation helps exchanges manage risk but can result in significant losses for traders.
Frequently Asked Questions
What is liquidation?
It is the forced closure of a leveraged position.
Why does liquidation happen?
Because losses exceed margin requirements.
Can liquidation be avoided?
Using lower leverage and risk management can help reduce the risk.