Forced Liquidation: Why Leveraged Positions Are Automatically Closed
Forced liquidation is a risk-control mechanism in leveraged trading: when a position can no longer meet margin requirements, the system automatically sells the asset at market price or closes the position. Understanding leverage, the liquidation price, and related fees helps newcomers recognize the risk of losing their entire principal.
What Is Forced Liquidation
Forced liquidation is a mechanism through which a platform or protocol involuntarily closes a user's position when specific conditions are met. Ordinary position closure means ending an existing position, which may involve selling assets in a long position or buying to close a short position; “forced” emphasizes that the action is triggered by risk rules rather than actively decided by the position holder.
Why Is Liquidation Triggered
When a trader's leveraged position continues to lose money and can no longer meet the margin requirements set by the platform, the system may close the position to prevent losses from further eroding the borrowed funds. The higher the leverage, the closer the liquidation price is usually to the entry price, so even a small market movement may trigger forced liquidation.
Examples and Key Risks
The original text uses a long position financed by borrowing to illustrate leverage: 50 USD combining own funds with 450 USD borrowed funds to form a 500 USD position. Ignoring fees, a price decline 10%reduces the position's value 50 USD, equivalent to exhausting the initial own funds. In practice, forced liquidation usually requires maintaining maintenance margin and accounting for fees, so 10%should not be treated as a universal forced-liquidation threshold; derivatives contracts do not necessarily use this actual borrowing structure.
What to Consider Before Trading
Forced liquidation usually also incurs additional fees, and the specific standards vary by platform. Before opening a position, understand the margin rules, estimate the liquidation price, and assess the impact of extreme volatility. Calculators can only assist in estimating profit and loss, target prices, and liquidation prices; they cannot eliminate the inherent risks of leveraged trading.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/forced-liquidation