What is Get Liquidated? Why does Get Liquidated happen? How to avoid Get Liquidated in investment trading? 【Newbie Investment Guide】

Market fluctuations often lead to significant losses for investors, and in such cases, it is easy to get liquidated. This article will explain in detail the concept of liquidation, its causes, and how to implement stop loss in a timely manner.

Definition and Causes of Getting Liquidated

“Get Liquidated” refers to the situation when an investor's trading direction is opposite to the market trend, causing the account equity (net value) to fall below the minimum margin requirement, resulting in forced liquidation.

In simple terms, when the funds in an investor's margin account are insufficient to maintain the contract, the open positions will be forcibly liquidated due to insufficient margin, a situation known as “Get Liquidated.”

Let's take a look at the Get Liquidated situation in different investment products:

Get Liquidated in Forex and CFD Trading

In forex trading, Get Liquidated is also known as forced liquidation. Forex and Contract for Difference (CFD) trading use leverage to lower the capital and margin thresholds. Before explaining Get Liquidated, we need to understand how margin is calculated and the mechanism of forced liquidation.

There are three contract sizes: standard (1 lot), mini (0.1 lot), and micro (0.01 lot). A 1 lot contract equals 100,000 currency units, and the required margin (also known as the advance payment) is calculated based on the leverage multiple. For example: placing an order for 0.1 lot, which is worth 10,000 currency units, for an underlying asset with 20x leverage, you need to pay a margin of 500 currency units. The calculation formula is: 100,000 × 0.1 ÷ 20 = 500.

Required Margin = 100,000 × Lot Size ÷ Leverage

When the margin account of an investor falls below the minimum ratio set by Gate (usually 30%, please confirm the specific value on the Gate platform), forced liquidation will be triggered. So, what is the margin ratio? Below we will introduce how to calculate the margin ratio and explain related terms.

The funds in the investor's margin account plus the fluctuation of profits and losses equal the account net value. Available margin = net value - used margin, and margin is also known as collateral.

Get Liquidated Reasons

Advance Payment Ratio = Net Value ÷ Advance Payment × 100%

When the margin ratio of the investor's account falls below the limit set by Gate (usually 30%), it will trigger a forced liquidation.

It is recommended that novice investors keep the prepayment ratio above 1000% to avoid increasing the risk of getting liquidated due to fluctuations in the market that lead to a decrease in net worth.

Get Liquidated in Cryptocurrency Trading

In cryptocurrency trading, when the client's equity (margin) becomes negative, it triggers a Get Liquidated. The cryptocurrency market has high Fluctuation, and the likelihood of Get Liquidated is higher than in forex trading. There have been instances where Bitcoin fluctuated by 15% in a short period, causing the majority of investors across the network to Get Liquidated. It is worth noting that Get Liquidated in cryptocurrency not only results in the loss of funds in the margin account but also causes the purchased cryptocurrencies to disappear.

Get Liquidated in Futures Trading

Futures are similar to CFD contracts, both being two-way markets, but futures have less trading flexibility, lower leverage, and the possibility of getting liquidated is smaller than in CFD trading. The condition for getting liquidated is also automatically triggered when the client's equity turns negative.

Get Liquidated in Stock Trading

Ordinary stock trading usually does not involve the risk of getting liquidated. The risk of forced liquidation only exists in margin trading or short selling, and generally requires paying 90% of the stock's value as margin. Stock liquidation usually occurs when investors short sell and the stock price rises, and Gate has the right to require investors to add margin. If the margin is not topped up in time, Gate has the right to execute forced liquidation.

How to Use Risk Management Tools to Prevent Getting Liquidated

Risk management tools are designed to help investors more effectively control the timing of their exit, avoiding unbearable losses during periods of market fluctuation. There are various risk management tools available on the market, and investors can choose based on personal preferences. Below, we will introduce the functions of several common risk management tools.

Take Profit and Stop Loss

Stop loss (SL) refers to the system automatically closing positions at a predetermined price to limit investor losses when the market price falls below that price. Conversely, take profit (TP) refers to the automatic closing of positions when the investor's profits reach a predetermined price. Investors can effectively implement risk management through this function, preventing total losses and calculating the risk-reward ratio.

The risk-reward ratio is used to measure the relationship between potential returns and risks. In other words, the lower the risk-reward ratio, the more advantageous the potential returns are relative to the potential risks.

Risk-Reward Ratio = (Entry Price - stop loss) ÷ (Take Profit Price - Entry Price)

How to set stop loss and take profit levels?

Some investors decide based on technical indicators such as support and resistance levels, moving averages (MA), etc. If you are not familiar with technical analysis indicators, you can also use the percentage method to set it. For example: set the price at ±5% of the buying price.

Negative Balance Protection

Under regulatory requirements, the negative balance protection mechanism is a protective measure that Gate must provide for all investors engaging in leveraged trading. This means that investors' losses will not exceed the amount deposited in their investment accounts, and when leveraged trading continues to deteriorate, Gate will bear the losses beyond that amount. However, to avoid huge losses caused by high leverage, Gate may proactively reduce leverage before significant market fluctuations. It is important to note that the negative balance protection is mainly designed to safeguard the funds of novice traders, allowing them greater room for error in the initial stages. For professional traders, this protection may not be entirely applicable.

Frequently Asked Questions: What is the difference between Get Liquidated, Forced Liquidation, and Liquidation?

Q: What is the difference between Get Liquidated and forced liquidation?

A: The basic concepts of Get Liquidated and forced liquidation are similar, and many investors view them as the same situation. If we break it down, the slight difference is that forced liquidation usually incurs losses up to a specific ratio, which depends on the prepayment ratio set by Gate. Get Liquidated refers to a situation where the market price gaps, causing Gate to be unable to respond in time, resulting in the margin reaching zero, and potentially requiring borrowing. Therefore, Get Liquidated can be equated with forced liquidation, but forced liquidation is not entirely equivalent to Get Liquidated. However, modern investors usually regard the two as the same situation.

Q: What is the difference between closing a position and getting liquidated?

A: Closing a position is when an investor voluntarily chooses to end their position based on stop loss or take profit prices, while getting liquidated occurs when severe market fluctuations result in insufficient margin for the investor, causing Gate to forcibly close the position.

Investing has both gains and losses. Investors should be more cautious when engaging in leveraged trading to avoid the risk of their accounts going to zero. Before making any trades, one should fully understand trading knowledge and effectively use risk management tools to set stop loss and take profit ranges to benefit long-term investment planning.