Author: Livia Tay, MY
Last Updated: March 6, 2025
When a trader's position is immediately liquidated in Contract for Difference (CFD) trading because there is not enough margin to sustain the deal, this is known as liquidation. Effective risk management and trading position maintenance depend on an understanding of this process.
Why Does Liquidation Happen?
Liquidation takes place when the available margin in a trader’s account drops below the required maintenance margin. This can happen due to:
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Market fluctuations: Rapid price movements can reduce equity in the account, triggering liquidation.
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Leverage exposure: CFDs are leveraged products, meaning losses can exceed the initial deposit if not managed properly.
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Insufficient margin top-up: If additional funds are not added to the account when margin levels drop, liquidation is likely to occur.
The Liquidation Process
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Margin Call Notification: Before liquidation, traders may receive a margin call, prompting them to deposit additional funds to maintain their position.
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Automatic Closure: If no additional funds are deposited and the margin requirement is not met, the broker will automatically close the position at the current market price.
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Final Settlement: Any remaining balance in the trader’s account after liquidation will reflect either the remaining equity or a negative balance, depending on the extent of the losses.
Impact of Liquidation
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Loss of Capital: Liquidation locks in realized losses, preventing any recovery if the market moves favorably afterward.
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Potential Negative Balance: In extreme cases, traders may owe more than their initial deposit, depending on broker policies.
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Trading Restrictions: Some platforms may restrict further trading activity until margin requirements are met.
By understanding the liquidation process, traders can take proactive steps to manage their CFD positions more effectively and avoid unnecessary losses.