A decision that destroys your investment dreams—Understanding the deadly power of liquidation

What exactly is a liquidation? Why does it happen when you’re unprepared?

You may have heard of someone losing everything overnight in an investment, even ending up in debt—that’s what is called “liquidation”. Simply put, liquidation occurs when your trading position is in the wrong direction, and your account balance falls below the minimum margin requirement. The trading system will automatically force close all your positions, leaving you with no chance to recover.

Even more frightening, liquidation not only wipes out your principal, but if the market moves too extremely, you could also end up in debt—owing money to the broker after losing all your capital.

Why does liquidation happen? There are two main reasons:

1. Incorrect judgment: You predict the market will move in a certain direction, but it moves in the opposite direction.
2. Insufficient margin: Your losses are too large, and your account equity falls below the broker’s minimum margin threshold.

When the system detects that your available margin isn’t enough to maintain your current positions, liquidation will be triggered.

Common operations that easily lead to liquidation

Excessive leverage

Leverage is a double-edged sword; it allows you to control larger trades with less capital, but risk is also amplified.

For example: you have NT$100,000 and open a 10x leverage position in futures trading, which equals trading NT$1,000,000 worth of assets. If the market moves just 1% against you, your principal is immediately lost by NT$10,000. If the market continues to fall by 10%, your margin is completely wiped out, and you may be called for additional margin—ultimately facing forced liquidation.

Many beginners start with confidence, believing they can handle high leverage, but markets often change faster and more violently than expected.

Hope for the best, stubbornly holding losing positions

This is one of the most common mistakes among retail investors. Knowing that your judgment was wrong, you still hold on with the mindset “It will rebound soon.” When a sudden gap-down occurs, brokers will liquidate your positions at market price at the open, resulting in losses far exceeding your expectations.

Hidden trading costs not fully accounted for

Many investors overlook some easily missed costs:

• Unclosed day trades: Planning to close positions within the day, but failing to do so, leaving positions overnight, which may require additional margin the next day. A gap down can trigger liquidation.
• Options seller risk: If market volatility suddenly spikes (e.g., due to major political events), margin requirements can double instantly, causing your account to fall below the required level.

Liquidity traps

Trading illiquid assets or during after-hours sessions, the bid-ask spread can be very wide. Setting a stop-loss at NT$100, but the only available buy order is at NT$90, so your stop-loss executes at this unreasonable price, resulting in losses far beyond expectations.

Black swan events cannot be prevented

During the COVID-19 crash in 2020 or the outbreak of the Ukraine war, when continuous limit-downs happen, even brokers may be unable to close your positions in time. Not only can your margin be wiped out, but you also face the risk of being “underwater”—owing money and being forced into debt.

The risk levels of liquidation across different investment products

The risk of liquidation varies depending on the investment product. Beginners need to understand the characteristics of each market and choose investment tools that match their risk tolerance.

High volatility risk in cryptocurrencies

Cryptocurrency markets are the most volatile and also the most prone to liquidation. Bitcoin once experienced a 15% single-day fluctuation, causing most investors to be collectively liquidated. When crypto assets are liquidated, not only does the margin disappear, but the purchased coins are also forcibly sold off.

Leverage traps in forex margin trading

The forex market is a game of using small amounts of money to control large positions. Many Taiwanese investors like to leverage in forex trading because it allows them to control larger positions with less margin.

There are three standard contract sizes in forex:

• Standard lot: 1 lot
• Mini lot: 0.1 lot
• Micro lot: 0.01 lot (most suitable for beginners to familiarize themselves with the market)

Margin calculation:

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

For example, trading 0.1 lot of a currency pair worth $10,000 with 20x leverage requires a margin of = $10,000 ÷ 20 = $500.

When your account margin ratio drops below the platform’s minimum standard (usually 30%), the broker will forcibly close your positions. For instance, if your account still has $500 but has lost $450, leaving only $50, the system will automatically liquidate your position, resulting in liquidation.

Stock market liquidation scenarios

Trading stocks with cash is the safest: buying stocks with 100% of your own funds means that even if the stock price drops to zero, you only lose your principal, and there’s no risk of liquidation or owing debt.

But margin trading and day trading carry hidden liquidation risks:

• Margin buying stocks: Borrowing money from brokers to buy stocks. If your maintenance margin falls below 130%, you will receive a margin call. If you don’t add funds, your positions will be liquidated. For example, using NT$600,000 of margin to buy NT$1,000,000 worth of stocks, a 20% decline in stock price can trigger a margin call.
• Failure in day trading: If the stock gaps down the next day and hits the limit-down, you may not be able to sell your stocks, and the broker will liquidate your positions. If your margin is insufficient, liquidation occurs.

Starting with risk management tools to prevent liquidation

Liquidation is not unavoidable; by understanding and properly using risk management tools, you can greatly reduce the chance of being wiped out.

Stop-loss and take-profit are lifesavers

Stop-loss (SL) is an automatic order to sell at a predetermined price, preventing losses from expanding further when the market drops to that level.

Take-profit (TP) is an automatic order to lock in profits at a target price, selling once the price reaches that level.

These two tools are key to controlling risk and avoiding total loss.

Risk-reward ratio is crucial—it determines whether a trade is worth taking:

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

A lower ratio indicates lower risk; for example, risking NT$1 to make NT$3 is a smart trade.

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

Experienced traders analyze support/resistance lines, moving averages, and other technical indicators. Beginners can use the simple “percentage method”: set 5% above and below the entry price as stop-loss and take-profit points. This way, you don’t need to watch the screen all day—stop when needed, take profits when appropriate, straightforward and clear.

The significance of the negative balance protection mechanism

Under proper regulation, negative balance protection is a mandatory safeguard provided by legitimate trading platforms. Simply put: you can only lose your account balance; you will not owe money to the broker.

Even if losses reach the bottom, the remaining losses are absorbed by the exchange, not transferred to investors. However, some large brokers proactively reduce leverage during major market volatility to avoid huge losses. This protection mainly serves as a safety net for beginners, allowing room for mistakes.

How beginners can start trading safely

For those new to investing, the risk of liquidation exists but is manageable. The key is choosing the right entry methods and tools:

Step 1: Start with cash stocks
Use your disposable funds to buy stocks, so you won’t face forced liquidation or debt. This is the safest way to learn.

Step 2: Avoid high-risk products
Futures, contracts, and leveraged products should be approached only after gaining sufficient experience.

Step 3: Adopt a steady strategy
Regular dollar-cost averaging is safer than all-in bets.

When you gain experience and want to try contract trading:

1. Start with the smallest size (0.01 lot micro lot)
2. Keep leverage below 10x
3. Always set stop-loss orders—never fight the market blindly

Investing involves both gains and losses. The market constantly tests your psychological resilience and risk awareness. Before trading, fully understand the mechanisms and risks of liquidation, and use stop-loss and take-profit tools to manage your positions. Only then can you survive longer and go further in this money game.