This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
What is Liquidation in Trading?
Liquidation is one of the harshest outcomes in leveraged markets. It happens when a position has moved far enough against you that your margin can’t support the open loss anymore. At that point the platform closes the trade to prevent the loss from expanding further. At Leverage.Trading, we track common failure patterns across leverage users. The same themes keep appearing: oversized positions, unclear margin usage, and poor execution discipline.
While liquidation can happen in any leveraged market — crypto, forex, or equities — the mechanics and risks vary between asset classes. Understanding these differences is the first step to protecting your capital. In fact, many of the same risk factors with leverage trading that cause liquidation also lead to over-leveraging, common outcome when traders use leverage before understanding how much adverse movement their margin can realistically support. Similarly, knowing the rules around margin calls can give you time to act before it’s too late.
In this guide, you’ll learn exactly what liquidation is, why it happens, and the practical steps you can take to avoid it — from position sizing and margin isolation to disciplined stop-loss placement.
Key Takeaways
- Liquidation occurs when your account equity drops below the maintenance margin required to keep a position open.
- It’s the broker’s way of protecting against further losses that could exceed your deposited funds.
- High leverage ratios increase the risk of liquidation, often reducing the margin for error to a fraction of a percent.
- Using isolated margin, stop-loss orders, and disciplined position sizing can help prevent forced liquidations.
- Understanding liquidation mechanics is essential for long-term survival in leveraged markets.
You will learn
What is liquidation in trading?
Liquidation is a complete loss of all capital in your live trading account due to losses that could not be supported by your margin capital.
If you need a broader understanding of this concept, here is what margin means in trading.
A margin call appears when your equity approaches the platform’s minimum requirement. It’s an early signal that the position no longer has enough margin buffer to absorb further movement.
If you don’t close out the position or add more funds to your account after getting the margin call and the market keeps going against you, you will suffer losses that are bigger than your overall account size, and all your positions will get closed out and liquidated.
After a liquidation, your account balance is set to 0 which means that all your deposited funds have been lost.
Liquidation is common among traders who size positions too aggressively or who don’t track their margin usage closely.
Any leveraged position has a liquidation threshold. The higher the ratio, the smaller the buffer between your entry price and the liquidation point.
Why does liquidation happen?
Liquidation happens when your current account balance can’t support your open losses in your trading account.
The calculation for this is pretty straightforward and can be explained with a simple example.
Let’s say that you have a trading account of $1000 and you open a position with all this money.
Your $1000 position will go up and down with the market and it can even lose as much as 99% of its value but it can never be liquidated.
Now, if we add a leverage ratio of 1:2 to this mix and open a maximum position size with your $1000 account, your position increases to $2000.
If you need a technical breakdown of how position size interacts with margin, see our detailed introductory guide to leverage in trading.
Remember that you only deposited $1000 in your account so your margin capital will only be able to handle a loss of $1000. If the position loses as much as $1001 you will get liquidated.
In this example, we don’t take into consideration commissions for opening the position. But this is the general idea of what liquidation means.
How can you avoid getting liquidated
There are a couple of ways to avoid liquidation completely and I will give you some general advice on how to stay safe without running the risk of losing your whole account.
Most liquidation events stem from structural issues: oversized positions, unclear margin allocation, or lack of defined exit rules.
Below is a list of the best ways to avoid liquidation in trading:
- Use conservative leverage – Higher ratios reduce the distance to your liquidation point, leaving very little room for adverse movement. Match your leverage to the typical volatility of the market you’re trading.
- Calculate your margin requirement – One of the most important aspects of trading any asset class with credit is to be able to calculate your leverage and your margin requirement for each position. If you know how much margin you put into each position then it’s less likely that you will liquidate your account.
- Use a stop loss – A stop-loss reduces the probability of reaching liquidation, though slippage or gaps can still occur. A defined exit rule should always be part of your plan.
- Trade only one market – Focus on a single market or instrument while you’re refining your execution. Managing multiple correlated positions increases the chance of losing track of your margin exposure.
- Isolated margin – Isolated margin contains the risk to the specific position you’re trading. It prevents a single losing trade from drawing margin from the rest of your account. The difference between cross margin vs isolated margin is whether the margin is shared or or contained between positions.
- Avoid markets that gap up or down – Be cautious with markets that close overnight. If a large gap occurs, your stop may not trigger at the intended level, which can accelerate the path to liquidation.
Some examples
If you have ever been liquidated I can only assume that it was a horrible experience that followed after a couple of bad losses and one final big loss that wiped out your entire stake. In this section, we are going to look at two different examples that can cause a liquidation in your trading account. The first example is a panic sell-off with a large position and the second example is a short position that gets out of control.
Example 1
This scenario is common when a trader scales into a position without a clear limit for total exposure.
Once the market gets overheated a large profit-taking sell-off initiates a panic sell-off that triggers a wave of liquidated positions. A defined exit rule, paired with conservative sizing, reduces the chance of being caught in a liquidation.
This type of liquidation usually happens very fast and the trader doesn’t see it coming before it’s too late.
This was a drop of about 15%-20% and if you were to use a leverage ratio of more than 1:5 you could not handle this situation without adding more margin capital or closing out your position with a large loss.
Example 2
Here is another common scenario where a trader thinks he or she has got a short position under control when in reality things could not be further from the truth. Short setups often fail when traders enter during a temporary pullback rather than a confirmed shift in trend direction.
The market breaks down, indicating a negative sentiment, and the second break is the entry point for our beginner trader. He or she opens the short position at the lows and follows the market for a few days until the underlying positive trends come back to life and push the short position into a liquidation.
These kinds of swing trades are very dangerous because things can start off well and it gives you a false sense of security. What you should do in this case is to always use a stop loss to prevent liquidation. Short-selling is very difficult and should only be attempted at very low leverage ratios.
Related: Can you short-sell without leverage?
How to determine your risk
To know your liquidation risk or liquidation price you can make a simple calculation to determine how much room your position has to move before getting liquidated. For example, if you use a 1:2 ratio, you have a 50% liquidation price. If you were to use a 1:3 leverage ratio, your liquidation price would shrink to 33%, and so on. Below is a table showing you the most common margin ratios and their liquidation risks/prices.
| Leverage ratio | 1:2 | 1:5 | 1:10 | 1:25 | 1:50 | 1:100 | |
| Liquidation risk/price | 50% | 20% | 10% | 4% | 2% | 1% |
As the leverage ratio increases, the liquidation threshold moves closer to your entry. Even small price movements can trigger it at higher ratios. Use this table to calculate your own risk of liquidation when using margin.
What other traders ask
What happens if you get liquidated on leverage?
When you get liquidated all your positions are closed out in a maximum loss and all your funds are lost.
Does leverage affect liquidation price?
Yes, it negatively affects the liquidation price. The more credit you add the closer your liquidation price gets. Higher ratios place the liquidation level very close to your entry. At extreme levels, a small fluctuation can be enough to close the position.
Does increasing leverage increase the risk of liquidation?
Yes, when you increase your credit you take on significantly more risk and you stand a much higher chance of getting liquidated.
Do you owe money if you get liquidated?
This depends if the broker has a negative balance protection policy. Without negative balance protection, you can owe your broker money when getting liquidated.
How do I stop liquidation crypto?
Lower ratios and isolated positions give you more room to manage adverse movement. Concentrating on a single instrument helps track margin usage more precisely.
Will margin call liquidate trades?
No, it will not. The margin call is a warning sign that you are close to getting liquidated.
Wrapping up
Liquidation is the worst-case scenario for any trader using margin and in this guide, I explain how liquidation happens, how it works, and also how to avoid it. Scale position size only after you’ve shown consistent control over margin usage and execution discipline.
These products carry structural risk. They require clear risk rules, defined trade plans, and a trading process that can handle large swings in price.
You need to protect your downside risk at all costs. However, should you fall victim to total liquidation, start over by first analyzing your mistakes.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
