What is liquidation and how does it happen?
When the margin on a leveraged position is no longer enough, the exchange closes the position by force. How it works and how it affects the market.
Forced closure
When the loss on a position opened with leverage reaches a certain level and the margin can no longer cover it, the exchange closes the position by force. This is called liquidation.
Why does it matter?
- Long liquidations mean the exchange is selling, which can speed up a decline.
- Short liquidations mean buying, which can speed up a rally.
- A chain of liquidations can cause sharp price moves in a short time (a cascade).
About liquidation maps
Liquidation maps are an estimated model of possible liquidation levels. They do not mean the price will necessarily reach those levels.
How to protect yourself
- Use low leverage.
- Set a stop-loss on every position.
- Risk only a small part of your capital on a single trade.
This material is for educational purposes only and is not investment advice.
