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 a Liquidation?

A liquidation in trading occurs when a trader's position is closed out by the exchange due to insufficient margin in case of an adverse market move. Liquidations are essential risk management mechanisms, ensuring that traders do not accumulate unsustainable losses and that their obligations are met. To avoid liquidation, traders are required to maintain a minimum margin to keep their positions open.

Complete vs. Partial Liquidations

Complete Liquidations: In a complete liquidation, a trader's entire position is closed out. This typically happens when the trader's margin balance falls way below the required maintenance margin, often due to a significant adverse market move. The entire position is sold or bought back at the prevailing market price to cover the losses and meet margin obligations.

Partial Liquidations: A partial liquidation, on the other hand, occurs when only a portion of a trader's position is closed. This can happen in situations where a trader's margin balance falls just slightly below the maintenance margin for a specific part of their position but remains sufficient for the rest. In partial liquidations, only the necessary portion of the position is closed to cover the margin deficit.

Partial liquidations are beneficial for traders for two primary reasons:

Risk Mitigation: They help traders manage risk by preventing the complete closure of all positions in response to a margin deficit in one part of the portfolio. Traders can retain exposure to the remaining part of their positions, which may still be in line with their trading strategy.

Position Preservation: Partial liquidations allow traders to keep some of their positions open, potentially benefiting from future market movements without starting from scratch. It's especially valuable when traders believe that only a portion of their portfolio is at risk due to market fluctuations.

Market Type

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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.

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