The truth about liquidation is revealed: Why do you lose everything? How to protect yourself with one move【Investment Must-Read】

The investment market is full of unpredictable twists and turns. A single misjudgment can cause your principal to instantly shrink, or even result in owing debts to brokers—this is the phenomenon that makes investors dread the term “liquidation”. It not only consumes your hard-earned capital but can also push you into a deep debt abyss! How does liquidation happen? Why is leverage so risky? And how can you prevent it? This in-depth analysis will help you stay away from the nightmare of liquidation forever.

What is liquidation? One sentence to understand instantly

“Liquidation” simply means that you’ve taken a wrong trading position, and when your margin can’t cover the losses, forced closure occurs.

Specifically: when your account net worth falls below the minimum margin threshold set by the broker, the system will automatically close all your positions without giving you a chance to recover. This process is called “liquidation”.

Conditions that trigger liquidation:

• Trading in the opposite direction of the market trend, continuously losing
• Account equity falls below maintenance margin requirements
• The system automatically executes forced liquidation, with no investor intervention

Why does liquidation happen? Revealing five high-risk operations

1. Setting leverage too high—double-edged sword out of control

High leverage is the most common cause of liquidation. Leverage is like a double-edged sword; it can amplify profits but also exponentially increase risks.

Real case: Suppose you use NT$100,000 of capital with 10x leverage on Taiwan index futures, controlling a position worth NT$1,000,000. Just a 1% adverse market move, and your principal loses 10%; a 10% move could wipe out your margin entirely, and you might receive a margin call, ultimately leading to forced liquidation.

Many novice investors overestimate their risk tolerance initially, thinking they can control leverage, but market changes often happen much faster than expected.

2. Holding onto losing positions—hoping for a rebound

This is a common fatal mistake among retail traders: holding onto a position with the hope “it will bounce back soon,” only to face a gap-down crash, where brokers close positions at market price at the open, resulting in losses far exceeding expectations.

3. Hidden costs not accounted for—overnight liquidation

Common scenarios include:

• Day trading not closed out: forgetting to settle, turning positions overnight, requiring additional margin, and then gapping down the next day, causing immediate liquidation
• Options seller risk: during volatility spikes (e.g., major political events), margin requirements suddenly double

4. Liquidity traps—stop-loss orders fail

Easily triggered in less-liquid assets or during after-hours trading:

• Wide bid-ask spreads may cause stop-loss orders to execute at unreasonable prices
• For example, aiming to stop-loss at NT$100, but the only available trade is at NT$90

5. Black swan events—impossible to predict

During the COVID-19 pandemic and Russia-Ukraine war, markets experienced consecutive limit-downs, and even brokers couldn’t close positions. As a result, margins were wiped out, leaving debts, and facing the risk of being “underwater” (losses exceeding account balance).

Different asset classes and their liquidation risks explained

Liquidation risks vary depending on the asset. Beginners need not be overly anxious; the key is choosing the right products and strategies.

Crypto liquidation—high volatility, high risk

The crypto market exhibits the largest amplitude, making it a high-risk zone for liquidation. Bitcoin once experienced a 15% single-day surge or plunge, directly causing most leveraged long positions to be liquidated.

Crypto liquidation scenarios: not only does your margin get wiped out, but the coins you purchased can also disappear.

Forex liquidation—small money playing with big risks

Forex margin trading involves using a small amount of margin to control a large position. Taiwanese investors favor leverage because it allows entry with less capital.

Forex contract sizes come in three standards:

• Standard lot: 1 lot
• Mini lot: 0.1 lot
• Micro lot: 0.01 lot (best for beginners)

Margin calculation formula: Margin = (Contract size × Number of lots) ÷ Leverage

Example: Using 20x leverage to trade 0.1 lot of currency pair (assuming position value of US$10,000) ➤ Required margin = 10,000 ÷ 20 = US$500

When the account margin ratio drops to the broker’s minimum standard (usually 30%), the system will automatically close the position—commonly called a “margin call” or “stop-out.”

Liquidation case: If your account balance is US$500, and losses reach US$450, leaving only US$50, the system will automatically close your position.

Stock liquidation—depends on trading style

Physical stock trading is safest: Using 100% own funds to buy stocks, even if the stock price drops to zero, only your principal is lost, and you won’t owe money to the broker.

But margin trading and day trading carry risks:

• Margin buying: Borrowing money from brokers to buy stocks; if the maintenance margin falls below 130%, you’ll receive a margin call. If you don’t add funds, your position gets liquidated (e.g., borrowing NT$600,000 to buy NT$1,000,000 worth of stock, and a 20% drop hits the margin call threshold)
• Failing day trades: If not closed out, positions become overnight, and if the market gaps down at open, brokers will liquidate, and insufficient margin leads to liquidation

Defensive strategies against liquidation: three essential tips for beginners

Advice for absolute beginners:

1️⃣ Start with physical stocks Buy stocks with spare cash; at least you won’t wake up to a margin call, making it the safest way to learn.

2️⃣ Avoid leveraged products Futures, contracts, and other leveraged tools should be tried after gaining experience.

3️⃣ Use conservative strategies Regular, dollar-cost averaging and diversification are much safer than all-in bets.

If you decide to trade derivatives:

1️⃣ Start with micro lots Trade 0.01 lot to gradually get familiar with market behavior.

2️⃣ Keep leverage low For beginners, recommended leverage is below 10x, leaving room for mistakes.

3️⃣ Always set stop-loss Never fight the market blindly; set a stop-loss price and let the system execute automatically.

Risk management tools—your trading life-saver

To avoid liquidation, risk management tools are your best defense.

Stop-loss and take-profit—automatic protection

Stop-loss(SL) sets an “automatic sell price”; when the price drops to this level, the system will automatically sell to prevent further losses.

Take-profit(TP) sets an “automatic profit-taking price”; when the target is reached, it automatically locks in gains.

These two features are crucial—they help control risk and prevent total loss in one go.

Risk-reward ratio—only trade worth it

The core concept of risk-reward ratio is “make more than you lose.” A lower ratio indicates a more profitable trade—aiming to earn 3 units for every 1 unit risked.

Calculation formula: Risk-reward ratio = ((Entry price - Stop-loss price)) ÷ ((Take-profit price - Entry price))

A lower value means the trade is more worthwhile.

How to set stop-loss and take-profit levels?

Experienced traders often refer to support/resistance lines, moving averages(MA), and other technical indicators.

Beginners can use the simplest method: “percentage method”—set 5% above and below the entry price. This way, you don’t need to watch the screen all day; stop-loss and take-profit are automatic, simple, and clear.

Negative balance protection—final safety net

Regulated brokers must provide negative balance protection. Simply put: you can only lose your account balance; you won’t owe debts to the broker.

In extreme cases, the remaining losses are borne by the broker. Some brokers proactively reduce leverage before major market moves to protect investors.

Final advice

Investing involves profits and losses, and leveraged trading amplifies both risks and opportunities. Before entering the market, thoroughly understand trading knowledge, and use stop-loss and take-profit to set risk boundaries. Only then can you survive long-term in the market.

Liquidation is not destiny; it is a preventable disaster—if you are cautious, rational, and disciplined.