To put it simply, what does liquidation mean?

Liquidation refers to the situation where the loss exceeds the account value in high-risk investments and the position is forced to be liquidated. It is common when the leverage is too high, the market is volatile, and the margin is insufficient. The consequences of liquidation are serious, including loss of all investment, additional debt, and damage to credit. Preventive measures include: rational use of leverage, risk management, market monitoring, and choosing reliable brokers.

A simple explanation of liquidation

In the financial market, liquidation means that when investors’ losses in high-risk investments such as futures and leveraged trading exceed the value of their accounts, they are forced to liquidate their positions (i.e. forced Sell ​​open position) situation.

Expand explanation

Liquidation usually occurs under the following circumstances:

• Investment leverage is too high: Investors use leverage beyond their tolerance to trade, amplifying potential gains while also magnifying potential losses .
• Significant market fluctuations: The market suddenly drops or rises, causing investors' positions to quickly suffer huge losses.
• Insufficient margin: The investor’s account balance is insufficient to cover the loss, resulting in liquidation of the position.

The consequences of liquidation are serious:

• Loss of all investments: Investors may lose all invested funds.
• Taking additional debt: If the amount of losses exceeds the account balance, investors may be required to repay the funds lent by the brokerage.
• Damaged credit history: A record of bankruptcies can affect an investor’s credit score, making it more difficult to obtain future loans or investment opportunities.

Preventive measures to avoid liquidation:

• Reasonable use of leverage: Only use leverage within an affordable range.
• Manage risk: Develop a risk management strategy and limit the maximum acceptable loss.
• Closely monitor the market: Know market dynamics in a timely manner and identify potential risks.
• Choose a reliable brokerage: Choose a regulated, reputable brokerage that provides appropriate risk management tools.

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