Understanding 'Liquidation' in Futures Markets and How to Avoid It
In the futures market, 'liquidation' refers to the situation when positions are forcibly closed due to low risk indicators or insufficient margin. This mechanism is also analogous to forced selling in the stock market.
The main reasons for a futures broker to enforce liquidation include:
- The risk indicator falls below an agreed threshold, typically not less than 25%.
- The trader fails to meet the margin call by the agreed deadline.
To avoid liquidation, traders should maintain their risk indicator above 100% and promptly address margin calls.
When executing liquidation, brokers consider the market's price fluctuations, and in volatile markets, unexpected losses may exceed traders' expectations. To mitigate risks, it is advisable for traders to establish clear trading plans and adhere strictly to them.
