Liquidation Explanation: Why does liquidation happen? How to protect your investment capital

During market volatility, a single misstep in decision-making can cause funds to evaporate instantly, or even result in debt—this is the investor’s worst nightmare, “爆倉” (liquidation). It not only wipes out all principal but may also leave you owing a huge debt. What exactly does “爆倉” mean? Why is high leverage operation so risky? And how can you timely brake and avoid catastrophic losses?

爆倉 Meaning: The Dilemma of Forced Liquidation

爆倉 refers to the situation where, if you make a wrong trading direction and your losses reduce your margin below the required minimum, the system forcibly closes your position. In simple terms, when your net equity falls below the broker’s minimum margin requirement, the system will automatically close all positions without giving any chance to recover. This enforced process is called 爆倉.

爆倉 Meaning & Causes:

• Your trading direction opposes market trend
• Account losses make margin insufficient
• Equity falls below maintenance margin standards
• System automatically triggers forced liquidation

Five Common Pitfalls Leading to 爆倉

1. Excessively high leverage

High leverage is the main cause of 爆倉. Leverage trading is like a double-edged sword—it can amplify profits but also magnify losses.

Example analysis: Suppose you use NT$100,000 principal with 10x leverage for futures trading, controlling a NT$1,000,000 position. When the market moves 1% against you, your principal loses 10%; if it moves 10% against you, your margin is instantly wiped out, facing margin calls and forced liquidation.

Many investors initially believe they can handle the risks, but market changes often exceed expectations. Be sure to carefully assess leverage levels and avoid letting it become a stumbling block on your investment journey.

2. Holding on to losing positions, refusing to cut losses

This is a common fatal mistake among retail investors—holding onto the hope that “it will rebound soon,” only to face a gap-down crash, where the broker liquidates at market open, resulting in losses far beyond expectations.

3. Underestimating hidden costs

Common overlooked costs include:

• Overnight positions due to unclosed day trades, requiring additional margin, leading to a gap-down explosion the next day
• Selling options during volatility surges (e.g., during elections), where margin requirements suddenly double

4. Illiquidity traps

Trading illiquid products or during night sessions, where bid-ask spreads are large. Stop-loss orders may execute at absurd prices—trying to set a stop at NT$100 but finding only NT$90 buyers, leading to severe losses.

5. Black swan events

Events like the COVID-19 pandemic shock or the Russia-Ukraine war outbreak, causing continuous limit-downs. In such cases, brokers may be unable to close positions, and investors not only lose their margin but also face the risk of being forced to cover at unfavorable prices.

爆倉 Risks Across Different Assets

Cryptocurrency: High volatility, high risk

The crypto market exhibits large fluctuations, making 爆倉 risk the highest among all assets. Bitcoin once surged or plunged 15% in a single day, causing many investors to be liquidated. During crypto 爆倉, not only does the margin disappear, but the held coins are also liquidated simultaneously.

Forex Trading: Playing with small money to control big money

Forex margin trading allows small capital to leverage large positions. Many investors like to open leverage to reduce margin requirements, but understanding the basics is essential.

Contract types include three categories:

• Standard lot: 1 lot
• Mini lot: 0.1 lot
• Micro lot: 0.01 lot (best for beginners)

Margin calculation formula: Margin = (Contract size × Number of lots) ÷ Leverage

For example: Using 20x leverage to trade 0.1 lot of currency (assuming a value of US$10,000) → Required margin = 10,000 ÷ 20 = US$500

When the account prepayment ratio drops to the platform’s minimum standard (usually 30%), the broker will trigger forced liquidation, commonly called “margin call” or “stop out.”

Example: An account balance of US$500 with a loss of US$450, leaving only US$50, will be automatically liquidated—this is 爆倉.

Stock Trading: Wide risk levels

Trading stocks with cash (using 100% own funds) “will not” 爆倉

Buying stocks outright with full cash is the safest; even if the stock price drops to zero, you only lose your principal, not owe debt.

Margin trading and day trading carry 爆倉 risk

• Margin buying stocks: When the maintenance ratio falls below 130%, a margin call is issued. If not replenished, positions are liquidated (e.g., borrowing NT$600,000 to buy NT$1,000,000 worth of stocks; a 20% drop in stock price triggers margin call).
• Failed day trades: If positions are not closed out and the stock gaps down the next day, brokers will liquidate, and insufficient margin leads to 爆倉.

Risk Management Tools: Life-saving tools for trading

Stop-loss and take-profit settings

Stop-loss (SL) is an automatic order to sell when the price hits a certain level, preventing further losses.

Take-profit (TP) is an automatic order to lock in profits when the price reaches a target. Both are crucial for effective risk control.

Risk-Reward Ratio Calculation: Risk-Reward Ratio = （Entry Price - Stop-loss Price）÷（Take-profit Price - Entry Price）

A lower ratio indicates a more favorable trade. For example, risking NT$1 to gain NT$3 yields a 1:3 risk-reward ratio, making the trade more worthwhile.

How to determine stop-loss and take-profit levels

Professional traders often use support/resistance lines, moving averages, and other technical indicators. Beginners can adopt a simple percentage method, setting stop-loss and take-profit points at around 5% above or below the entry price, balancing risk and convenience.

Negative balance protection mechanism

Regulated trading platforms must provide negative balance protection, ensuring investors can only lose up to their account funds, preventing owing money to brokers. If losses reach bottom, the remaining deficit is borne by the broker. Some brokers proactively lower leverage before major market moves to reduce risk. This protection mainly targets beginners, allowing room for mistakes.

爆倉 Prevention Practical Tips

Three key tips for beginners:

1️⃣ Start with cash stocks: buy with idle funds, at least avoiding margin calls

2️⃣ Avoid leverage products: futures, contracts, and high-risk instruments should be approached after gaining experience

3️⃣ Use a steady strategy: regular dollar-cost averaging is far safer than all-in bets

If you still want to try contract trading:

1️⃣ Practice with micro lots: start with 0.01 lot to familiarize yourself with market operation

2️⃣ Keep leverage low: beginners should not exceed 10x

3️⃣ Always set stop-loss orders: never stubbornly hold against the market; disciplined trading is key

Investing involves both gains and losses; when engaging in leverage trading, extra caution is required. Before any trade, fully understand trading knowledge and utilize risk management tools like stop-loss and take-profit to develop a long-term, stable investment strategy.