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Risk and portfolio

Liquidation

The automatic closing of a leveraged position once its collateral is exhausted, done by the platform rather than by the trader.

When losses consume the posted margin, the position is closed automatically at whatever price is available. On crypto derivatives venues this is instantaneous and unavoidable, with no call and no grace period.

Liquidations feed on themselves. Forced closing sells into a falling market, which pushes price to the next cluster of liquidation levels and triggers those too. Cascades of hundreds of millions of dollars inside an hour are routine in crypto.

The defence is position size rather than cleverness. Liquidation price is a function of leverage and collateral, both of which are chosen before the trade, and no stop-loss placed afterwards can help if the gap jumps straight through it.

Also known as: liquidated · forced close · liquidation cascade

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Educational definition. It is not investment advice and not a recommendation about any particular instrument.