Is it possible to owe money after a liquidation? An in-depth analysis of the deadly pitfalls of leverage trading and the risks of adding to positions

During market volatility, a single misstep can cause your principal to evaporate instantly, and in some cases, even lead to owing money—this is the trader’s worst fear: liquidation. Many people think liquidation simply means losing all their principal, but they don’t realize that the true risks of high leverage are far beyond imagination. How exactly does liquidation happen? Why is adding to a position so prone to triggering a margin call? And how can you use proper risk management tools to protect yourself? This article explains everything thoroughly to help you safeguard your hard-earned money.

The Essence of Liquidation: Why Does It Go to Zero Overnight?

Liquidation occurs when you have taken the wrong trading position, and your losses accumulate to the point where you can no longer cover the margin, prompting the trading platform to automatically close your positions. Simply put, it’s when your account net worth falls below the broker’s minimum margin requirement, and the system doesn’t give you a chance to turn things around—it just cuts all your positions.

Three main causes of liquidation:

1. Incorrect market direction judgment — The market moves completely against your position
2. Insufficient margin — Equity falls below the minimum maintenance margin requirement
3. Unexpected volatility — Sudden gaps or black swan events

The most terrifying part is that liquidation not only wipes out your principal but can also leave you owing money to the platform—this is known as the “margin risk of being underwater.”

Operations Most Prone to Trigger Liquidation

1. Opening with Excessive Leverage

Leverage is like a double-edged sword. Using 100,000 yuan of capital to open a 10x position means controlling a 1 million yuan position. A 1% adverse move then results in a 10% loss of your principal; a 10% move can instantly vaporize your margin and trigger a margin call.

Many beginners overestimate their risk tolerance at the start. Market changes are often much faster than expected. While high leverage feels exciting, it becomes the biggest stumbling block on your investment journey.

2. Holding on to Losing Positions, Refusing to Cut Losses

This is a common mistake among retail traders. Clinging to the hope that “it will rebound soon,” they hold on during a gap-down crash, only to be forced to sell at market price by the broker, resulting in losses far exceeding expectations. A poor mindset can cost you hundreds of thousands.

3. Adding to Losing Positions

Many people try to “average down” when they lose money, but this is especially dangerous when the trend is unclear. If you initially misjudged the direction and lost 20%, then add to your position to average down, and the market continues to decline, your losses can multiply rapidly, and margin requirements will skyrocket. If the market doesn’t rebound as expected, adding to your position accelerates your path to liquidation.

4. Hidden Costs Not Fully Calculated

• Overnight positions that aren’t closed result in holding costs, requiring additional margin
• Selling options during volatility spikes can double margin requirements
• Illiquid assets may have wide bid-ask spreads, causing stop-loss orders to execute at unreasonable prices

5. Liquidity Traps

In after-hours trading or with less popular assets, the bid-ask spread can be shockingly wide. If you want to set a stop-loss at 100 yuan but only find buyers at 90 yuan, you may be forced to exit at a much lower price.

6. Black Swan Events

Unexpected events like the COVID-19 pandemic or the Russia-Ukraine war can cause continuous limit-downs. Sometimes even the platform cannot close positions in time, leaving investors not only wiped out of their margin but also owing money to the platform.

The Different Risks of Liquidation Across Asset Types

Cryptocurrency Trading

Cryptocurrency markets have the highest volatility, making liquidation a significant risk. Bitcoin once fluctuated 15% within a single day, causing widespread liquidations across the network. Worse, during crypto liquidations, not only does your margin evaporate, but your holdings can also disappear.

Forex Margin Trading

Using small amounts of money to control large positions is a hallmark of forex trading, but it’s also the easiest way to get liquidated.

Contract specifications come in three types:

• Standard lot: 1 lot
• Mini lot: 0.1 lot
• Micro lot: 0.01 lot (best for beginners)

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

For example, placing a 0.1 lot order (worth $10,000) with 20x leverage: Required margin = 10,000 ÷ 20 = $500

When your account’s pre-deposit ratio drops to the platform’s minimum requirement (usually 30%), a forced liquidation occurs. If your account balance is $500 but your loss is $450, leaving only $50, the system automatically closes your position—liquidation happens.

Stock Trading

Trading with actual stocks is the safest — using 100% of your own funds to buy stocks means that even if the stock price drops to zero, you only lose your principal and won’t owe the broker.

But margin trading and day trading are different:

• Margin buying: If your maintenance ratio drops below 130%, you’ll receive a margin call. For example, using 600,000 yuan of margin to buy 1 million yuan worth of stocks, a 20% decline in stock price can trigger a margin call.
• Failed day trades: If you don’t close your position and it becomes a overnight hold, and the stock gaps down the next day, the broker may liquidate your position directly. If your margin isn’t enough, you’ll face liquidation.

Where Should Beginners Start?

Step 1: Choose the Right Asset for Entry

• Start with actual stocks, using spare cash
• At least you won’t get stopped out while sleeping

Step 2: Avoid Leverage Products

• Don’t touch futures or contract trading for now
• Wait until you gain experience and capital

Step 3: Keep Strategies Stable

• Regular savings are safer than all-in bets
• Don’t get overly emotional about short-term ups and downs

If you want to advance into contract trading:

• Start with micro lots (0.01 lot)
• Keep leverage below 10x
• Always set stop-loss — never fight the market blindly

Using Risk Management Tools to Prevent Liquidation

Risk management tools are your lifesavers—they help you effectively control risk.

Stop-Loss and Take-Profit

Stop-loss is setting an “automatic sell price,” so when the price hits that point, your position is closed to prevent further losses.

Take-profit is setting an “automatic exit point,” so when the price reaches your target, you lock in gains.

These two functions are crucial—they are the foundation of risk control. Many liquidations happen because traders fail to set stop-losses, holding on with the hope that “it will rebound,” only to be wiped out by the market.

Risk-Reward Ratio Calculation: Risk-Reward Ratio = ((Entry Price - Stop-Loss Price)) ÷ ((Take-Profit Price - Entry Price))

A lower ratio indicates a more favorable trade. For example, risking 1 yuan to make 3 yuan is much better than risking 3 yuan to make 1 yuan.

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

Advanced traders often use support/resistance lines, moving averages, and other technical indicators.

For beginners, a quick method is the “percentage method”: set stop-loss and take-profit at 5% above and below the entry price. Simple and clear, it helps avoid constantly worrying about the market.

Negative Balance Protection Mechanism

Regulated platforms should offer negative balance protection. Simply put, you can only lose the money in your account—you won’t owe the platform any debt. However, some brokers proactively reduce leverage during major market moves to control risk.

This protection is mainly designed for beginners, giving them room to make mistakes. But don’t become overconfident, as there is still a risk of being underwater.

Final Trading Advice

Investing involves both gains and losses, and leverage trading amplifies both. Before opening a position:

• Fully understand trading rules and risks
• Use stop-loss and take-profit tools to set exit points
• Decide leverage based on your account size
• Avoid adding to losing positions to average down
• When uncertain about the market, reduce your position size

Remember: protecting your principal is always the top priority. Staying alive to trade another day is the key to continuing to earn.