A liquidation happens when an exchange forcibly closes a trader’s position because their collateral dropped below the minimum required. It prevents traders from going into negative balance.
How It Works
When trading with leverage (e.g., 10x), the exchange lends you money. If price moves against you, your collateral shrinks. When it hits the liquidation price, the exchange auto-closes the position.
Example: You put $100 with 10x leverage ($1000 position). If price drops 10%, you lose your entire investment — liquidated.
Cascade Liquidations
When price drops sharply, long positions get liquidated. This adds selling pressure, pushing price lower — triggering more liquidations. This cascade effect often causes sudden 5-10% drops in minutes.
Disclaimer: This is not financial advice. Always do your own research.