Full Analysis of Liquidation Crisis: Why Do You Lose Everything During Market Gaps? Essential Survival Skills for Beginners

Many investors’ nightmares begin with an ordinary opening—when a market shock hits, your positions instantly collapse, not only evaporating your principal but possibly leaving you with a huge debt to the broker. This disaster is called “liquidation”. It’s not a risk from legends, but a tragedy played out every day in trading markets. What exactly is the mechanism behind liquidation? Why are high-leverage traders especially vulnerable? And what emergency strategies can help you escape unscathed?

The Essence of Liquidation: The Cold Logic Behind System-Enforced Position Cuts

Simply put, liquidation occurs when your losses exceed the broker’s tolerated limit, prompting the system to forcibly close all your positions.

When you engage in margin trading, the broker sets a “maintenance margin threshold.” As long as your account’s net value falls below this threshold, the system will mercilessly liquidate all your positions—regardless of whether you acknowledge losses or market rebound signs.

Why does liquidation happen? There are only two core reasons:

1. Wrong market direction — Your trading judgment is against the market, gradually eating into your margin
2. Principal cannot be maintained — When your equity drops below the maintenance margin requirement, automatic liquidation becomes unavoidable

It’s like a ruthless machine: once conditions are triggered, it executes immediately.

The True Culprits of Liquidation: Risks You Think You Can Control

The higher the leverage, the faster the death

10x leverage sounds reasonable, but the actual calculations can be shocking. Suppose you use 100,000 NT dollars of capital with 10x leverage on a TAIEX futures trade, equivalent to managing a 1 million NT dollar position. If the market moves against you by just 1%, your principal loses 10%; a 10% move wipes out your margin entirely.

And that’s not the scariest part. The real horror is: market volatility often moves much faster than you think. A gap opening, a news event, a sudden incident can wipe out years of savings in seconds.

The “Hold On” Mindset: The Deadly Bet on “It Will Rebound Soon”

Retail traders most commonly make the mistake of refusing to accept losses. Holding onto the hope that “this time it will rebound,” they end up hitting a limit-down streak. Brokers then execute market orders at opening, closing positions at prices far below expectations, instantly tripling losses.

Invisible Bombs: Costs You Didn’t Count On

• Failed day trading turns into overnight positions — Forgetting to settle margin requirements can cause a gap-up or gap-down the next day, leading to liquidation
• Options seller risks — When volatility surges (like during major elections), margin requirements can double suddenly
• Liquidity traps — Illiquid stocks or after-hours trading can have huge bid-ask spreads, making stop-loss orders execute at absurd prices (e.g., aiming to sell at 100 NT, but only getting 90 NT)

Black Swan Events: Disasters You Can’t Predict

2020 pandemic crash, Ukraine-Russia continuous limit-downs, dollar surges… During these events, market liquidity dries up, and even brokers can’t help you close positions. When margins are wiped out and debts remain, you face “margin call”—your account turns negative.

Liquidation Risk Map for Different Assets

Liquidation risks vary by asset class; choosing the right product can significantly reduce disaster chances.

Cryptocurrencies: The Most Volatile Betting Game

Crypto markets are extremely volatile. Previously, Bitcoin’s daily fluctuation reached 15%, causing most investors online to be liquidated simultaneously—this kind of “herd liquidation” further accelerates market declines, creating a vicious cycle.

Crypto liquidation is the most damaging: not only can your margin be wiped out, but your entire holdings can be forcibly closed and disappear.

Forex Trading: The Double-Edged Sword of Playing with Small Money

Forex margin trading attracts many Taiwanese investors because it allows controlling large positions with small capital. Many open high leverage positions to reduce entry costs. But here are some key points to understand:

Contract units in three tiers:

• Standard lot = 1 lot (base currency value of NT$100,000)
• Mini lot = 0.1 lot (NT$10,000)
• Micro lot = 0.01 lot (NT$1,000, ideal for beginners)

How is margin calculated?

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

Example: Placing a 20x leverage order for 0.1 lot of currency (worth US$10,000) ➤ Required margin = 10,000 ÷ 20 = US$500

When your account’s prepayment ratio drops to the platform’s minimum standard (usually 30%), the broker will forcibly close positions. For instance, if you have US$500 left but lose US$450, leaving only US$50, the system will immediately liquidate—this is forex liquidation.

Stock Trading: Margin and Day Trading as the Breeding Ground for Liquidation

Spot stock trading is quite safe — using 100% personal funds to buy stocks, maximum loss is your principal, and you won’t owe the broker.

But margin buying is dangerous — borrowing NT$600,000 to buy NT$1,000,000 worth of stocks; if the stock price drops by just 20%, you hit the margin call threshold (maintenance ratio below 130%). Without topping up, your position gets liquidated.

Day trading failures can also lead to liquidation — if you fail to close positions and leave overnight, a gap down can trigger broker liquidation, and insufficient margin results in liquidation.

Self-Help Checklist for Beginners

Stage One (Complete Newbie):

1. Start with spot stocks — buy with spare cash, avoiding forced liquidation
2. Stay away from leveraged products — leave futures, options, etc., for later
3. Regular savings plans are better than all-in — reduce risk by 100 times

Stage Two (Want to Advance to Leverage Trading):

1. Practice with micro lots — 0.01 lot to get familiar with market feel
2. Set conservative leverage — don’t exceed 10x as a beginner
3. Always set stop-loss — don’t stubbornly hold against the market

Three Lines of Defense in Risk Management

Stop-loss and Take-profit: The Lifesavers in Trading

Stop-loss(SL) is setting an automatic sell price—when the stock hits that point, the system sells automatically, preventing further losses.

Take-profit(TP) is setting an automatic profit target—when the price reaches your goal, it sells to lock in gains.

These two features are often overlooked but are the first line of defense against liquidation.

Risk-Reward Ratio Calculation:

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

A lower ratio indicates a better risk-to-reward trade. Using NT$1 risk to earn NT$3 is far better than risking NT$3 to make NT$1.

How to Set Stop-Loss and Take-Profit Levels?

Advanced traders analyze support/resistance lines, moving averages(MA), and other technical indicators. Beginners can use the simplest method — the “Percentage Method” — set 5% above and below the entry price, so you don’t need to watch the screen all day. Stop when needed, take profits when available, with a clear logic.

Negative Balance Protection: The Last Safety Net

Regulated trading platforms must offer negative balance protection—you can lose at most what’s in your account, and won’t owe debts to the broker. When losses reach bottom, the broker absorbs the loss themselves.

But note: some brokers proactively reduce leverage before big market moves to avoid huge losses. This protection mainly safeguards beginners, giving room for mistakes, but it’s not a guarantee of safety.

Final Words of Warning

Investing involves profits and losses—that’s no empty talk. Before each trade, make sure you thoroughly understand trading knowledge and utilize risk management tools to set stop-loss and take-profit ranges. If losses exceed your psychological or account capacity, exit immediately—no rebound is worth risking a liquidation.

Liquidation isn’t bad luck; it’s a failure of risk management. Master these protective strategies, and you’ll be able to survive longer in the market.