## Unveiling the Truth About Liquidation: Why Does Investment Suddenly Drop to Zero?

**Liquidation** is the most terrifying outcome in margin trading. Simply put, when your account equity falls below the minimum margin threshold set by the broker, the system automatically closes all positions, instantly evaporating your principal, and you might even end up owing money. This risk is not caused by natural disasters but stems from the operational logic of leverage trading—using small amounts of money to control large positions. If the market moves against you, losses are magnified exponentially.

## How Liquidation Works: Why Forced Closure Happens

The core reason for liquidation is only one: **market volatility exceeds your tolerance**.

When you choose leverage trading, you are essentially borrowing money from the broker. This borrowed amount comes with a cost—the broker requires you to deposit a certain percentage of the position as "margin" as collateral. As long as your account’s net value can cover this margin, trading continues. But once losses accumulate and your account equity drops below the broker’s maintenance margin requirement, the system will immediately trigger a forced liquidation mechanism, leaving no room for recovery.

For example: you open a position with 100,000 yuan using 10x leverage with 10,000 yuan of your own funds. You control a 1,000,000 yuan position. If the market moves against you by just 1%, you lose 10,000 yuan (10% of your principal); if it moves 10%, your entire principal is wiped out, and you face a margin call.

## High-Risk Operations Leading to Liquidation: How Many Are You Guilty Of?

### High leverage is the top cause of liquidation

The higher the leverage ratio, the greater the profit potential, but risk increases proportionally. Many traders overestimate their risk control ability and are caught off guard by unexpected volatility. It is recommended that beginners keep leverage below 10x to leave buffer space for sudden market changes.

### Losing control of your mindset and holding onto losing positions

"Just wait a bit, it will rebound..." This is a classic phrase among retail traders suffering losses. But the market often doesn’t give you time to wait—when a gap-down occurs, brokers will directly liquidate at market price, resulting in losses far exceeding expectations. Setting stop-loss points and strictly executing them is much more effective than hoping for luck.

### Ignoring hidden costs

Day trading without closing positions? Overnight margin requirements. Selling options during volatility spikes? Margin requirements can double instantly. These often-overlooked hidden costs can be the last straw that breaks the camel’s back.

### Liquidity risk

In less popular assets or during after-hours trading, bid-ask spreads can be outrageously wide. Want to set a stop-loss at 100 yuan but find only 90 yuan offers are available? Your stop-loss could slip by 10%. Be especially cautious during low-liquidity periods and with less liquid products.

### Black swan events with no warning

2020 pandemic, Russia-Ukraine war, major geopolitical events—such sudden shocks can lead to continuous limit-downs, and even brokers may be unable to close positions in time. At such moments, your margin could be wiped out, and you face the risk of being "underwater" (owing debt).

## Liquidation Risk Map for Different Assets

### Stock Trading: Risk Levels Vary Greatly

**Trading with actual stocks is the safest**. Using your own funds to buy stocks means that even if the stock price drops to zero, you only lose your principal, and you will never face liquidation or debt.

**But buying stocks on margin hides dangers**. When the maintenance margin falls below 130%, the broker issues a "margin call." For example, if you buy 1 million yuan worth of stocks with 600,000 yuan of margin, a 20% drop in stock price will trigger a margin call, forcing you to add funds or face forced liquidation.

**Day trading that turns into holding positions overnight is also risky**. If you fail to close your position and the stock gaps down the next day, the broker will liquidate your position, leading to liquidation if your margin is insufficient.

### Forex Trading: The Rules of Playing Big with Small Money

Forex margin trading is attractive because of leverage. You can control large positions with a smaller principal, but the cost is amplified risk.

**Contract size determines risk level**: Standard lots (1.0) carry the fastest losses, mini lots (0.1) have moderate risk, micro lots (0.01) are most suitable for beginners.

**Margin calculation example**: With 20x leverage and a 0.1 lot currency pair (assuming $10,000), the required margin = $10,000 ÷ 20 = $500. When your account’s prepayment ratio drops to the platform’s minimum (usually 30%), the broker will execute a forced close.

Real scenario: When your account balance is $500, and losses reach $450 leaving only $50, the system will automatically close your position, resulting in liquidation.

### Cryptocurrency: Volatility Hell

Due to large market swings, cryptocurrencies are high-risk zones for liquidation. There have been instances where Bitcoin fluctuated 15% within a single day, causing many investors to be liquidated en masse. The nightmare of crypto liquidation is not only losing your margin but also the coins you bought disappearing simultaneously—a double blow.

## Practical Tools to Prevent Liquidation

### Stop-loss and take-profit: The Lifeline of Trading

**Stop-loss (SL)** is an automatic order to close a position at a predetermined price. When the price hits this point, the system automatically exits, preventing unlimited losses. **Take-profit (TP)** is an automatic order to lock in profits when the target price is reached.

The combination of these two functions determines the **risk-reward ratio**. Calculation formula: Risk-Reward Ratio = (Entry Price - Stop-Loss Price) / (Take-Profit Price - Entry Price). The lower the ratio, the more attractive the trade—using 1 unit of risk to earn 3 units of reward is a sustainable trading approach.

### How to set stop-loss and take-profit

Experienced traders usually base their decisions on support and resistance lines, moving averages, and other technical indicators. Beginners can adopt a simple **percentage method**: set 5% above and below the entry price. This way, you don’t need to watch the screen all day but can still effectively control risk.

### Negative balance protection mechanism

Regulated trading platforms must provide this protection. Simply put, **you can only lose your account balance; you will not owe money to the broker**. Once your account is wiped out, subsequent losses are borne by the platform. This mechanism mainly protects novice investors, giving beginners room to learn from mistakes.

## Essential Checklist for Beginners to Prevent Liquidation

✓ Start with stock trading to build skills, using spare funds for safety
✓ Keep leverage within reasonable limits, recommended below 10x for beginners
✓ Always set stop-loss and take-profit, never stubbornly hold onto losing positions
✓ Understand hidden costs, calculate overnight fees, commissions, and other expenses
✓ Trade during high-liquidity periods and with popular assets to avoid slippage
✓ Maintain a humble attitude—black swan events can happen at any time

Liquidation may seem terrifying, but fundamentally it results from improper use of leverage. By understanding risks, setting up protective tools, and maintaining strict discipline, you can minimize the risk of liquidation. Investing involves gains and losses; the key is to **have your defenses in place before losses occur**.