Recently, I saw many beginners in the community get scared, talking about liquidation with a look of fear. Actually, there's no need to be that afraid. As long as you understand how it happens, you can avoid getting caught off guard.

Liquidation, simply put, is when you bet in the wrong direction, lose so much that your margin is no longer sufficient, and the system forcibly closes your position. Imagine you use 100k yuan of capital with 10x leverage to trade, which is equivalent to a 1 million yuan position. If the market moves 1% against you, you lose 10% of your capital. If the fluctuation reaches 10% in the opposite direction, your margin is completely wiped out, and you’ll be required to make a margin call, eventually leading to forced liquidation. That’s liquidation.

Why does liquidation happen? Mainly because you bet on the wrong direction and used too much leverage. I’ve seen many people hold the mindset of “it will rebound soon,” but then encounter a gap-down drop, get liquidated at market price, and lose far more than expected. Some also trade unpopular assets or night session trading, where the bid-ask spread is absurdly wide, and stop-loss orders get filled at terrible prices—aiming to sell at 100 yuan but only getting 90 yuan because someone bought. Even worse are black swan events, like pandemics or wars, causing continuous limit-downs, where even brokers can’t close the position, and after margin is wiped out, they still owe money.

The risk of liquidation varies greatly across different assets. Cryptocurrencies, due to their large price swings, are considered high-risk. I remember Bitcoin once fluctuated 15% up or down, causing most investors to get liquidated, and not only was the margin wiped out, but the coins you bought also disappeared. Forex trading is a game of using small amounts of money to control large positions. Margin = (contract size × lot size) ÷ leverage. When your account’s margin ratio drops to the minimum (usually 30%), the system will automatically close your position. For stocks, spot trading is the safest—if the stock drops to zero, you only lose your principal and won’t owe money. But margin trading stocks is dangerous; if the maintenance margin falls below 130%, you’ll receive a margin call. If day trading fails and you hold the position overnight, a gap-down limit-down can make it impossible to sell, and the broker will liquidate your position.

To avoid liquidation, risk management tools are essential. Stop-loss and take-profit are like life-saving charms in trading. Set automatic stop-loss and take-profit prices so you won’t suffer huge losses when the market turns. Beginners can use simple percentage methods—set 5% above and below the purchase price—so you don’t have to watch the screen anxiously all day. Also, there’s a negative balance protection mechanism that regulated exchanges must provide. Simply put, it means you can only lose the money in your account and won’t owe money to the broker.

A simple piece of advice for beginners: start with spot trading to practice, using spare money so you won’t wake up to a margin call. Avoid leveraged products and futures contracts until you’re more experienced. A stable strategy and dollar-cost averaging are 100 times safer than going all-in. If you really want to trade futures, start with micro contracts. Don’t open full leverage—recommend below 10x for beginners—and always set a stop-loss. Never stubbornly hold onto a position against the market. Investing involves profits and losses; before trading, you must properly understand trading knowledge and make good use of risk management tools to set stop-loss and take-profit levels. Only then can you effectively control the risk of liquidation and survive steadily in the market over the long term.