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Liquidation Call
What is a Liquidation Call?
A liquidation call in cryptocurrency trading refers to the process where a trading platform forcibly closes a trader's position because the margin account balance falls below the required maintenance margin. This typically occurs in margin trading or futures markets when the market moves against the trader's position.
Key Aspects
Margin Trading: Primarily occurs in leveraged trading environments.
Automatic Process: Usually executed automatically by the trading platform.
Risk Management: Designed to protect the exchange from losses due to trader insolvency.
Threshold Trigger: Activated when account equity falls below a predetermined level.
Position Closure: Results in the forced closing of some or all of the trader's open positions.
How Liquidation Calls Work
Margin Monitoring: The platform continuously monitors the trader's margin level.
Price Movement: Unfavorable market movements reduce the account equity.
Margin Call: A warning may be issued when equity approaches the maintenance margin.
Liquidation Threshold: If equity falls below the maintenance margin, liquidation is triggered.
Position Closing: The platform sells the assets to cover the borrowed funds.
Factors Influencing Liquidation
Leverage Used: Higher leverage increases the risk of liquidation.
Market Volatility: Sudden price swings can quickly trigger liquidations.
Maintenance Margin: The minimum equity ratio required to keep positions open.
Account Balance: The total funds available in the trading account.
Open Position Size: Larger positions are more susceptible to liquidation.
Consequences of Liquidation
Loss of Position: The trader loses their open position.
Potential Total Loss: In some cases, the entire margin may be lost.
Fees: Additional liquidation fees may be charged.
Account Restrictions: Some platforms may impose restrictions after liquidation events.
Market Impact: Large liquidations can cause further market volatility.
Preventing Liquidation
Proper Risk Management: Setting appropriate stop-loss orders.
Monitoring Positions: Regularly checking on open positions and market conditions.
Adding Margin: Depositing additional funds to increase the margin buffer.
Reducing Leverage: Using lower leverage to decrease liquidation risk.
Diversification: Spreading risk across multiple positions or assets.
Similar Terms
Margin Call: A demand for additional funds, often preceding liquidation.
Consensus Mechanism: The method by which agreement is reached on the state of the network.
Stop-Loss Order: An order type used to limit losses, often used to prevent liquidation.