🌊Liquidation

In the world of trading, managing risk is paramount. Traders often encounter situations where their positions face potential liquidation. However, not all liquidations result in the complete closure of a position. This article explores the concepts of liquidations and partial liquidations, shedding light on how they work and why they matter to traders.

What is Liquidation?

Liquidation is the process of forcibly closing a market position when a trader can no longer maintain their open position due to insufficient margin. This occurs when the losses on a trade reach a level where the margin (collateral) is no longer sufficient to cover the losses.

Full and Partial Liquidation

On the Storm Trade, the mechanism of full liquidation is applied to positions.

Previously, partial liquidation was relevant as closing part of a position could shift the market price relative to the index price, helping to avoid liquidation. However, after an increase in open interest (OI) and a significant reduction in price spread, the impact of position size on price became minimal. As a result, partial liquidation is no longer effective for price adjustment and is no longer used on the platform.

Monitoring position health

Monitoring the health of your trading positions is a critical aspect of risk management. To facilitate this, Storm provide visual indicator of position health, using a color-coded health-bar of green, yellow, and red.

• Green: When your position is in the green, it signifies a healthy state. Your margin and balance are comfortably above the liquidation threshold. This is an ideal scenario, indicating that your risk exposure is well-managed.

• Yellow: A yellow indicator suggests caution. It means your position is approaching the liquidation threshold, and your margin balance is getting close to the minimum required. This is a warning sign that you should monitor your position closely and consider adding more margin if market conditions are unfavorable.

• Red: The red indicator is a clear signal that your position is in a precarious state. Your margin balance is dangerously low, and the market is close to triggering a liquidation. It's crucial to take immediate action in this situation. Adding more margin or closing a portion of the position to reduce exposure are prudent steps to consider.

As a rule of thumb, consider adding margin to your position before it reaches the yellow or red state. Proactive margin management can help prevent unexpected liquidations and provide you with greater control over your trades. Regularly monitoring these visual indicators, along with keeping a close eye on your position's liquidation price, is essential for responsible and successful trading.