What is forced liquidation

A forced liquidation is a transaction initiated by a broker to close a losing position and is triggered when the trader's account balance cannot cover the loss. The specific process includes: position loss leading to balance decline, margin call, failure to add funds, and forced liquidation. Forced liquidations are often caused by excessive leverage, improper position management, market volatility and poor trading strategies. The consequences include loss of funds, damage to your credit history and psychological impact.

What is forced liquidation?

A liquidation is a transaction initiated by a broker to close a trader’s losing position. This happens when a trader's account balance cannot cover the amount of their losses.

How Forced Liquidation Works

When a trader’s account balance drops below the maintenance margin level, the broker will automatically close their losing positions. Maintenance margin levels are minimum account balances set by brokers to ensure traders can cover losses on their trades.

The specific process is as follows:

1. Loss in position: The trader’s trading position incurred losses, resulting in a decrease in the account balance.
2. Margin Call: If the account balance drops below the maintenance margin level, the broker will issue a margin call asking the trader to add additional funds.
3. Failure to add funds: If the trader fails to add funds in time, the broker will forcefully close the losing position.
4. Position Closure: The broker will close the trader’s losing position and settle the loss amount.

Causes of forced liquidation

Forced liquidation is usually caused by the following reasons:

• Excessive leverage: Traders use excessive leverage, which magnifies the risk of loss.
• Improper position management: Traders hold large numbers of related or one-way trades, increasing the likelihood of losses.
• Market Volatility: Unexpected market fluctuations cause traders to suffer significant losses on their positions.
• Trading strategy errors: Traders fail to implement effective trading strategies, resulting in continuous accumulation of losses.

Effects of Forced Liquidation

Forced Liquidation is a serious consequence for traders and may have the following effects:

• Loss of Funds: Traders will suffer a loss in the value of their losing positions .
• Damage to credit history: Forced liquidation may affect a trader’s credit history, making it more difficult for them to obtain future loans or credit.
• Psychological impact: Forced position liquidation will bring huge psychological pressure to traders, leading to frustrated confidence and changes in trading behavior.

The above is the detailed content of What is forced liquidation. For more information, please follow other related articles on the PHP Chinese website!