Liquidation, often called forced liquidation, is a risk management procedure used by futures companies. It is not an action initiated by the trader but is instead executed by the broker based on exchange regulations and internal risk control policies. To help distinguish between forced liquidations and voluntary trades, trading platforms typically mark these orders with a "Liquidation" label in order lists, history, and transaction records.
Understanding why liquidations occur is crucial for active traders. Here are the common reasons:
Common Causes of Liquidation
Excessive Leverage and Margin Shortfalls
One of the most frequent reasons for liquidation is using too much leverage, leading to a margin deficit. When your account’s margin level exceeds 100%, it means your available balance is negative, placing your positions at high risk. At this point, the broker may forcibly close some or all of your holdings until your available funds return to a positive or zero balance.
Most trading platforms will issue warnings when your margin level is too high. To avoid liquidation, you can either add more funds to your account or close some positions voluntarily to restore a positive available balance.
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Holding Positions Into Delivery Month
Exchange rules often prohibit retail investors from holding positions into the delivery month for certain contracts. Traders must close these positions before the last trading day specified for individual investors. If they fail to do so, the broker may step in and force-liquidate the holdings.
You can check the last trading day and delivery month rules for each contract in the "Contract Details" or "Specifications" section of your trading platform.
Failing to Meet Lot Size Requirements
Some contracts allow retail investors to hold positions into the delivery month but require that those positions meet a minimum lot size multiple. If your holdings do not comply with these requirements, you may still face forced liquidation.
Always verify the specific contract rules regarding lot size and delivery month eligibility in the contract specifications section provided by your platform.
Exceeding Position Limits
If your holdings exceed the exchange’s position or trading limits, you may be subject to forced liquidation. These limits are designed to maintain market stability and prevent excessive speculation.
It’s essential to stay informed about the current position limits for each contract you trade to avoid unexpected liquidations.
Identifying Liquidation Records
Most modern trading platforms display a "Liquidation" tag on relevant orders in your trade history. This feature is generally available on updated app and desktop versions (e.g., App v6.2.0+ or PC v4.10.0+).
If you're unsure whether a particular trade was a liquidation, check for this label in your order history or transaction details.
Frequently Asked Questions
What exactly is liquidation in trading?
Liquidation is the forced closure of positions by your broker when your account no longer meets margin requirements or violates exchange rules. It is a protective measure to prevent negative balances and extreme losses.
How can I avoid being liquidated?
You can avoid liquidation by monitoring your margin level regularly, reducing leverage when necessary, closing positions before delivery deadlines, and adhering to exchange position limits. Using stop-loss orders can also help manage risk.
Will I be notified before liquidation occurs?
Many brokers send warnings when your account is at risk, giving you a chance to add funds or reduce positions. However, notification policies vary, so it’s important to understand your broker’s specific procedures.
Can I reopen a position after it’s liquidated?
Yes, once your account is back within required risk parameters, you can open new positions. However, it’s crucial to address the initial cause of the liquidation to avoid recurrence.
Does liquidation affect my credit or trading record?
Liquidation itself doesn’t directly harm your credit score, but it results in realized losses and may impact your ability to trade with certain brokers if it happens frequently.
What should I do if I believe a liquidation was in error?
If you suspect an error, contact your broker’s customer support immediately. Have details like order IDs, timestamps, and relevant account information ready to facilitate the investigation.
If you have further questions about liquidation rules or procedures, reach out to your broker’s support team for clarification.