What Is Liquidation?
Liquidation is the forced closure of a leveraged trading position by the exchange or broker when the position's equity falls below the maintenance margin requirement. The remaining collateral is used to settle the position at market — often at a worse price than the trader would have chosen voluntarily.
Liquidation prices are calculated based on the leverage used and the maintenance margin. With 10x leverage, a 10% adverse move (minus fees) hits liquidation. With 100x leverage, a 1% adverse move liquidates.
In crypto especially, liquidations are constant and large. Volatile assets combined with retail traders running 25-100x leverage produce billions in daily liquidations during volatile sessions. This is not an accident — the exchanges profit from the spread and fees collected during liquidations.
The lesson: leverage past 3-5x significantly increases liquidation risk. Most professional traders avoid putting themselves in positions where a single bad day can wipe them out.