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Liquidation Meaning

The process by which an exchange or a protocol forcibly closes a trader's position because they no longer have enough "collateral" to cover their potential losses. This happens when a leveraged trade moves in the opposite direction of the trader's bet.

For example, if you are "Long" on Bitcoin with 10x leverage and the price drops 10%, your entire "Margin" is gone. To prevent the exchange from losing money, an automated "Liquidation Engine" sells your position to the market.

This often happens in a "cascade," where one liquidation pushes the price down, triggering another, and so on. Liquidations are the most common way that retail traders lose money in crypto.

Because the market is so volatile, even a "correct" long-term bet can be liquidated by a temporary "wick" down in price. Successful traders use "Stop-Loss" orders to exit their trades before they reach the liquidation point.

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