What does liquidation mean? How much is the loss?

Liquidation refers to a loss situation in futures or leverage trading where a position is forced to be liquidated due to insufficient margin due to market fluctuations. The loss in a liquidated position is equal to the difference between the market value of the position and the margin balance. Methods to avoid liquidation include: setting stop loss orders, setting appropriate leverage ratios, monitoring market fluctuations, ensuring sufficient margin, and avoiding chasing ups and downs.

What is liquidation?

Liquidation refers to a situation where the margin account balance is lower than the minimum requirement to maintain a position due to market price fluctuations in futures or leverage trading, resulting in forced liquidation.

Loss caused by liquidation

Loss caused by liquidation is equal to the difference between the market value of the position and the balance of the margin account. For example:

• The investor’s position is worth 1 million yuan, and the margin balance is 200,000 yuan.
• The market price fell by 30%, and the position value dropped to 700,000 yuan.
• The margin balance is lower than the requirement to maintain the position (usually 20%), resulting in liquidation.
• Loss amount: 1 million yuan (position value) - 700,000 yuan (position value after liquidation) - 200,000 yuan (margin balance) = 100,000 yuan

How to avoid liquidation

Avoid liquidation The best way is to:

• Set reasonable stop loss orders: Automatically close positions when the market price reaches a certain level to limit potential losses.
• Set an appropriate leverage ratio: The higher the leverage ratio, the greater the risk of liquidation. You should choose an appropriate leverage ratio based on your risk tolerance.
• Monitor market fluctuations: Pay close attention to market dynamics and avoid trading during times of severe fluctuations.
• Ensure sufficient margin: The margin balance should be sufficient to cover potential losses to avoid liquidation.
• Avoid chasing the rise and selling the fall: When the market performance is extreme, do not blindly chase the rise or sell the fall to avoid greater losses caused by impulsiveness.

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