One move to understand what liquidation means | Why do trades get into trouble? Complete defense guide

The four most terrifying words in trading markets are “爆仓” (liquidation). A single misstep in operation can instantly wipe out your principal, and sometimes you even end up owing a large sum to the broker—that’s the real nightmare. What does “爆仓” mean? Why is high leverage so dangerous? And how can risk management tools help you save yourself? This article covers all the key points in one go.

What does “爆仓” mean? Explained in one simple sentence

爆仓 means your account net worth falls below the broker’s minimum margin requirement, and the system automatically forces liquidation of all your positions. In other words, when you lose so much that you can’t even cover the margin, the trading platform will proactively close your positions, leaving no chance for a comeback.

It sounds cruel, but it’s actually a self-defense mechanism of exchanges—to prevent clients from losing more than their margin and accumulating huge debts. However, for traders, liquidation is the most frightening reality.

Why does “爆仓” happen? The underlying reasons

Market movement contrary to your prediction is the fundamental cause of liquidation. You expect prices to rise, but they fall; you short-sell expecting a decline, but prices suddenly surge. But what often triggers liquidation isn’t just simple loss, but a combination of the following deadly factors:

1. Excessively high leverage is the root cause

Leverage is like a double-edged sword. Suppose you use 100,000 NT dollars of capital to open a 10x position, effectively controlling a 1 million NT dollar position. If the market moves just 1% against you, your principal is lost by 10%. A 10% move can instantly evaporate your margin, leading to forced liquidation.

Many beginners start confident, thinking they can control risks, but market volatility often exceeds expectations. High leverage is like dancing on the edge of a cliff—one misstep and you fall into an abyss.

2. The psychological stubbornness of not admitting defeat

“Just wait a bit, it will rebound…” This mindset has caused many traders to fail. Holding onto positions in hope, only to face gap-down drops, results in brokers executing market orders to cut losses, often far beyond expectations. Not setting stop-losses and stubbornly holding positions is like digging your own grave.

3. Hidden costs and traps

When day trading turns into overnight holding, margin requirements suddenly increase; when selling options during volatility spikes (like during elections), margin requirements can double. These hidden costs are often overlooked until forced liquidation occurs, leading to sudden realization.

4. Liquidity traps

In less popular assets or during after-hours trading, bid-ask spreads can be huge. Trying to set a stop-loss at NT$100, but the market only has buyers at NT$90, causes the stop-loss to be executed at an unreasonable price, quickly depleting your margin.

5. Black swan events

Pandemic crashes in 2020, Russia-Ukraine war, consecutive limit-downs… During extreme market conditions, even brokers may be unable to close positions in time. Margin can be wiped out instantly, and traders may end up with debts from holding positions overnight.

Different assets have different liquidation risks｜Are you playing in a high-risk zone?

The risk of liquidation varies across different investment products. Choosing the right assets can help avoid the nightmare of losing everything overnight.

Cryptocurrency: High risk of liquidation

Crypto markets are several times more volatile than traditional markets. A daily 15% swing in Bitcoin is not uncommon, enough to cause liquidations across the entire network. Even more frightening, crypto liquidation not only wipes out your margin but also results in your holdings being forcibly closed and disappearing, leaving you with total loss.

Forex trading: Playing big with small money

Forex margin allows you to control large positions with a small amount of capital. Taiwanese investors love to leverage, but it’s a double-edged sword.

Three contract specifications:

• 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, trading 0.1 lot (worth $10,000 USD) with 20x leverage: Required margin = 10,000 ÷ 20 = $500 USD

When your account margin ratio drops to the platform’s minimum (usually 30%), the broker will directly “liquidate” your position without negotiation.

Stock trading: Physical stocks are safest, margin trading is risky

Physical stock trading (100% own funds): Maxes out at losing your principal, but will never cause liquidation.

Margin buying stocks: Borrowing money from brokers to amplify positions. If the maintenance margin falls below 130%, a margin call is issued. For example, using NT$600,000 of margin to buy NT$1,000,000 worth of stocks, a 20% drop in stock price triggers a margin call, and if you don’t add funds, forced liquidation occurs.

Day trading failures: If you don’t close positions, overnight gaps can cause limit-down sales that you can’t execute, leading brokers to liquidate your positions, causing liquidation if your margin is insufficient.

Risk management tools: Your trading survival guide

Liquidation isn’t unavoidable; the key is to make good use of risk management tools. Here are three essential methods for traders.

Stop-loss and take-profit: Automatic exit mechanisms

Stop-loss (止損) is setting an automatic sell price. When the stock price hits the set point, the system automatically sells to prevent unlimited losses. Take-profit (止盈) is setting an automatic profit target; when the price reaches the goal, it automatically cashes out.

These two features may seem simple, but they are the first line of defense against liquidation.

Risk-reward ratio: Assess whether a trade is worth it

The lower the risk-reward ratio, the more favorable the trade. Using NT$1 of risk to earn NT$3, with lower risk, yields more stable profits.

Calculation formula: Risk-reward ratio = ((Entry price - Stop-loss price)) ÷ ((Take-profit price - Entry price))

Setting stop-loss and take-profit levels

Experienced traders look at technical indicators (support/resistance, moving averages), while beginners can use the straightforward “percentage method”—setting 5% stop-loss and take-profit levels above and below the entry price. This way, you don’t have to watch the market anxiously all day; discipline ensures timely stops and profits.

Negative balance protection mechanism

Regulated trading platforms should offer negative balance protection, meaning you can only lose your account funds and won’t be pursued for debts beyond that. During high-risk periods, brokers may proactively reduce leverage to prevent huge losses. This protection mainly helps beginners, giving them room to make mistakes.

What beginners must know: Starting from zero to avoid liquidation

To avoid the tragedy of liquidation, traders should:

1. Start with physical stocks—use spare cash, so you won’t be forced out overnight.
2. Avoid leverage products first—futures, contracts, and other high-risk tools should be left to experienced traders.
3. Use a steady strategy—regular investing is 100 times safer than all-in.
4. Always set stop-losses—never stubbornly hold against the market; cut losses when needed.

If you insist on trading derivatives, start with micro lots (0.01 lot), keep leverage below 10x, and always set stop-losses. That’s the way to survive.

What does “爆仓” mean? Final warning

In essence, liquidation is a comprehensive failure of risk management. It reminds every trader: the market is never absolute, and leverage amplifies both gains and losses. In cryptocurrencies, forex, stocks, and other assets, the power of liquidation should never be underestimated.

Investing involves profit and loss; the key is how to survive and walk out of the market. Use stop-loss and take-profit wisely, control leverage, avoid stubborn holding, and turn the threat of liquidation into zero. The market is always there, but your capital isn’t infinite—every trade should ask yourself: “Can I handle the worst-case scenario in this trade?”