Unit 1 · Level 4 · Leverage & Margin
Liquidation: the forced exit
A leveraged position uses borrowed funds, and the lender (the exchange) will NOT take losses for you. When your equity falls to the maintenance threshold, the exchange force-closes your position at market. You don't get asked. You often pay an extra liquidation fee for the privilege. Your stop-loss, placed properly, should ALWAYS act before liquidation can.
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What you get asked
Why is 'my liquidation price is my stop-loss' a catastrophic plan?
A stop is a planned exit that keeps most of your capital. Stop = you lose 1R and keep trading. Liquidation = you lose the whole margin and pay extra. The difference between a scratch and an amputation.
Order the death spiral of an unmanaged leveraged position
'Adding margin to avoid liquidation' is doubling down on a losing trade with extra steps. It's the loss aversion from League 2, now with a lender attached.
Match the exit to its character
Two of these are decisions; two are consequences. Professionals only ever meet the first two.
In fast crashes, cascading ___ accelerate the fall; each forced close pushes price into the next trader's trigger.
Liquidation cascades: the dominoes behind crypto's famous wicks. Billions in leveraged positions can unwind in minutes. Now you know what those violent candles ARE.
You open a 10x long at an entry price of €100 (ignore maintenance margin for now). Roughly at what price does liquidation hit?
At 10x, a 10% adverse move consumes 100% of your margin: €100 − 10% = €90. Real liquidation arrives even SOONER thanks to maintenance margin; the exchange never waits for zero.
Exchange offers up to 125x leverage. Knowing everything you know, this is best read as…
At 125x, a 0.8% wiggle liquidates you, and 0.8% happens every hour. The house isn't gambling; it's harvesting. Decline politely. 🐜
The rest of this unit
Amplification, liquidation, short selling, and why the 1% rule survives it all.