Actually, many people don’t fully understand what it means to get liquidated in derivatives trading. They think it’s just losing all their principal and that’s the end of it, but the truth is far more terrifying than you can imagine. Recently, I saw a friend whose account was wiped out after a single careless leverage trade, and he ended up owing a huge amount of debt—only then did he truly realize how dangerous this is.

Simply put, liquidation in derivatives trading means you bet on the wrong direction. You lose so much that you can’t even top up the margin, and the system immediately cuts your entire position. It doesn’t give you a chance to recover—you’re forced to close the position right away. Why does this happen? Because if the market moves against your position and your principal falls below the broker’s minimum margin threshold, the system automatically activates a forced liquidation mechanism. It sounds simple, but when it actually happens, it can make people fall apart.

There are several ways that most easily lead to liquidation. The first is using too much leverage—this is the most common reason. For example, if you use 100,000 in principal to trade futures with 10x leverage, you’re effectively controlling a 1,000,000 position. As long as the market moves against you by just 1%, you lose 10%; if it moves against you by 10%, your margin will basically be wiped out, and you may also face margin calls. Many people initially believe they can control risk, but market changes are often much faster than expected.

The second common mistake is a stubborn “let it turn around” mindset. Holding onto the idea that it will rebound if you wait a bit longer, only to run into a gap-down big drop: the broker will cut your position at market price directly, and your loss ends up far beyond what you expected. Others also fail to account for hidden costs—for instance, if you day trade but forget to close the position after the day, you may be required to pay additional margin; then the next day you get a gap down, and you get liquidated instantly. Or if you’re playing the options seller side, when implied volatility surges, the margin requirement can suddenly double.

Liquidation risk differs greatly across different assets. For cryptocurrencies, the market’s price swings are large, so it’s considered a high-risk zone. Bitcoin has seen up-and-down swings of 15%, which caused most investors across the network to get liquidated. And during liquidation, it’s not only that the margin is lost—your purchased coins can also disappear. In forex margin trading, you use a small amount to control a large amount. The margin is calculated as contract size multiplied by number of lots, then divided by the leverage. For example, if you place an order with 20x leverage for 0.1 lot, assuming the value is 10,000 USD, the required margin is 500 USD. When your account’s prepaid margin ratio drops to the minimum ratio set by the platform, the broker will force liquidation.

Stocks are different. Spot stock trading using 100% of your own funds is the safest. Even if the stock price drops to zero, you only lose your principal—you won’t end up owing money. But leveraged stock buying via margin is different: if the maintenance margin falls below 130%, you’ll receive a margin call order. If you don’t add funds, you’ll be cut off (forced liquidation). If a day trade fails and you end up holding overnight, and the next day the stock gaps down and hits the limit-down price so you can’t sell, the broker will cut your position directly.

To avoid liquidation, risk management tools are a must. Stop-loss and take-profit are like lifesaving charms for trading. By setting an automatic order price, when the stock price drops to your set level, the system automatically sells, preventing you from losing more and more. Take-profit is setting an automatic profit price: once the price reaches your target, it automatically locks in gains. Make sure you calculate the risk-reward ratio clearly—risking 1 unit of money to earn 3 units is worth it.

When deciding your stop-loss and take-profit levels, beginners can use a simple percentage method. Setting 5% above and below the buy price is enough—you don’t need to spend all day anxiously watching the chart. Experienced traders will look at technical indicators such as support and resistance lines and moving averages. There’s also a negative balance protection mechanism. Under regulation, at most you’ll lose only the money in your account—you won’t owe the broker. This protection is mainly there to shield beginners and give novices some room to make mistakes.

My advice is: if you’re still a beginner, start by practicing with spot trading. Use spare money to buy stocks so you won’t wake up one day to get cut off. Avoid leverage products like futures and contracts until you’re more experienced. If you truly want to trade contracts, start with micro positions, don’t max out leverage—beginner guidance is to keep it below 10x—always set a stop-loss, and never stubbornly fight the market. Investing can bring both gains and losses. Before making any trade, you should properly understand trading knowledge, make good use of risk management tools to set stop-loss and take-profit ranges, and only then can you invest steadily and safely in the long term.