Liquidation

Liquidation is the forced closing of a leveraged position by a trading venue when the collateral (margin) backing it falls below a required maintenance level. Because leverage means the position is larger than the deposited capital, adverse price moves can quickly exhaust that capital; to prevent losses beyond the margin, the venue automatically sells or buys back the position at the prevailing market price.

This can happen partially or fully, and often at an unfavourable moment, locking in the loss. The level that triggers it is the liquidation price. A common misconception is that liquidation returns the original deposit; the margin is typically consumed by the loss and associated fees.