Forced Liquidation

Forced Liquidation is the automatic sale of a trader's assets when their account balance cannot cover the margin requirement. In leveraged trading, investors borrow funds to increase their positions. If the market moves against them, and their losses exceed a predefined threshold, the exchange automatically sells enough assets to cover the loss. This prevents further loss and ensures the lender recovers the borrowed funds. It often occurs in volatile markets, where sharp price movements can quickly erode equity. Forced Liquidation helps maintain market stability and protects exchanges from potential defaults by traders.