What is Blow Up terms means? Reasons and how to prevent it.
Definition Forced liquidation usually occurs in financial markets such as stocks, forex and futures. The value of an investment can fluctuate due to rapid market changes. If an investor fails to add an appropriate margin deposit to their account for various reasons, the value of the investment will deviate too much from the value at the time the position was opened. In this case, a margin deposit could not cover the loss of the account and a forced liquidation ensued. Forced liquidation is also common in margin trading and contract trading in cryptocurrency markets. In the case of forced liquidation, the assets in the account will be dissolved. Investors lose all their capital.
1. Prices fluctuate and price trends go against expectations.
2. Your account will be confiscated and the value of funds in your account will be reduced.
3. It increases the associated leverage and reduces the amount of loss your account may suffer.
4. Price fluctuations continue and investors do not increase their profit margin deposits during the period.
5. Margin cannot cover losses. Forced dissolution occurs.
Reasons for liquidation Here are some of the many reasons for forced liquidation.
1. There is no stop loss. If the investor does not determine the stop loss price and does not react quickly when the price fluctuates, there could be a forced liquidation.
2. Large positions with high leverage. If an investor holds a large amount of assets in one position and trades with high leverage, even a small swing in price can lead to forced liquidation in a short period of time. For example, if an investor chooses 100x leverage, forced liquidation will occur when the price moves 1%.
3. Insufficient margin call. Forced liquidation may occur if the investor does not deposit additional funds to the margin account when the price fluctuates.
4. A Black Swan event will occur. If something unexpected happens in the market, prices can fluctuate significantly and be forced to cash.
Difference between clearing and forced clearing
Clearing is also done on common financial markets such as forex, stocks and futures. However, clearing is a trading activity that an investor uses to voluntarily close a position, e.g. B. when an investor buys at a bargain price. He or she can sell it to liquidate an asset and vice versa. Clearing is actively used by investors themselves for stop-loss or stop-earning purposes. This is in contrast to forced clearing, where clearing is used by the exchange and investors lose all their capital.
How can forced liquidation be avoided?
First of all, investors can use risk management tools such as stop-loss orders when trading. Investors also need to be careful in switching positions and depositing additional margin as required. In addition, investors need to trade with reasonable leverage. Lastly, investors need to understand the trading rules of different exchanges or platforms and be careful while investing.