One of the most important things in leveraged trading is knowing what liquidation is and managing your positions accordingly. Today, I will try to explain how margin works in long and short positions because many people misunderstand this topic.

Actually, when you ask what liquidation is, it simply means your position is automatically closed. This happens when your collateral falls to a certain level. Liquid margin is the minimum protection amount you need to have before reaching this point.

When you open a long position, you expect the price to go up, but do you know what happens if it goes the opposite way? For example, with $1,000 in capital and 10x leverage, you buy Bitcoin at $20,000. The total position is $10,000. If the price drops to $18,000, a 10% decrease, all your capital is gone. This is when you experience what liquidation is — your position is closed and you lose your money.

In a short position, the opposite occurs. With the same conditions, you open a short at $20,000, expecting the price to fall. But if the price rises to $22,000, a 10% move, it wipes out all your capital. The exchange automatically closes the position, and this is what liquidation means.

As you can see, a price decrease causes liquidation in long positions, while a price increase causes liquidation in short positions. To avoid crossing the margin level, you should always set a stop loss. Knowing what liquidation is when using leverage is fundamental to risk management. Calculate your liquidation price before opening a position and act accordingly. This way, you can protect yourself from significant losses during unexpected market movements.