A liquidation call is the process where a trading platform forcibly closes a trader’s position because the margin account balance falls below the required maintenance margin. This typically happens in leveraged trading, where traders borrow funds to increase their position size.
Traders can use leverage to open positions larger than their account balance by borrowing funds. They must maintain a certain margin, which is a fraction of the total position size. For example, if a user has 20x leverage, their position would be liquidated if the underlying asset’s price moves by 5% against their position.
Another scenario is if the value of the asset significantly drops, in which case the margin balance may fall below the required maintenance level. At this point, the platform issues a margin call, asking the trader to deposit more funds to cover potential losses.
If the trader does not meet the margin call, the platform automatically closes (liquidates) the position to prevent further losses. This ensures that the trader does not lose more than they can repay and helps protect the platform and its liquidity.
One option to help minimise the risk of a liquidation call is adding a stop-loss order to help mitigate the risk of liquidation.
