TradingIntermediate#Risk#Leverage
Liquidation
L
Definition
A contract- or platform-defined process that closes or transfers a leveraged position when collateral no longer meets its maintenance requirement. The trigger, price source, penalties, partial-close rules, and loss outcome vary by product and venue.
Source reviewed
- CFTC: Understand the risks of virtual currency trading opens in a new tab
Supports: Explains that leveraged futures amplify risk and that adverse moves can require customers to refill margin accounts or close positions, with losses potentially exceeding initial investment.
- CFTC: Digital asset risks to remember opens in a new tab
Supports: Warns that leverage amplifies risk and that digital-asset trading platforms and protections vary.
Concept Diagram
Key Takeaways
1
Liquidation rules are specific to each contract, platform, price source, and margin system
2
Leverage amplifies losses, and adverse moves can require margin or force a close
3
Fees, funding, interest, mark prices, oracle prices, and partial-close rules affect thresholds
4
Claims about liquidation hunting do not prove intent or predict a reversal
Practical Example
Before opening a leveraged position, a user reads the venue's maintenance-margin tiers, mark-price method, liquidation fee, funding schedule, and deficit policy. They model multiple adverse price and fee paths rather than treating a displayed liquidation price or a social-media chart as a guaranteed threshold.
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Related Terms
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Stop LossAn order instruction that activates when a specified trigger is reached. Its behavior, trigger source, availability, and execution price depend on the venue and order type; it cannot guarantee a maximum loss.
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Short SqueezePressure on short sellers to close positions after a sharp price rise or difficulty borrowing the security. Their purchases can add upward pressure, but a price rise or short-interest figure alone does not prove that a squeeze is occurring or predict one.
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Exit LiquidityInformal market slang for the buyers or available order-book demand that allow another holder to sell. It does not prove that a buyer is uninformed, that sellers are insiders, or that a price will fall.
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DerivativesA contract whose value or payoff is linked to an underlying asset, rate, index, event, or another reference. It is a separate contractual position, not the same thing as holding the referenced asset.
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