Liquidation
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In the world of trading, risk management is of paramount importance. Traders often encounter situations where their positions may be liquidated. Letโs break down what that means.
Liquidation is the process of forcibly closing a position in the market when a trader is unable to maintain their open position due to insufficient margin. This happens when the losses on a trade reach a level where the margin (collateral) can no longer cover the losses.
On the Storm Trade platform, the mechanism of full position liquidation is applied.
Previously, partial liquidation was relevant, as closing part of a position could shift the market price relative to the index, which helped avoid liquidation. However, after the increase in open interest (OI) and a significant reduction in the price spread, the influence 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 the status of trading positions is a crucial aspect of risk management. To facilitate this task, Storm provides a visual indicator of position status, using color coding: green, yellow, and red.
๐ข Green: When your position is shown in green, it means that it is in a healthy state. Your margin and balance are above the liquidation threshold. This is the ideal scenario, indicating that your risks are well-managed.
๐ก Yellow: The yellow indicator signals caution. It means that your position is approaching the liquidation threshold, and your remaining margin is getting closer to the minimum required value. This is a warning to closely monitor your position and consider if market conditions become unfavorable.
๐ด Red: The red indicator is a clear signal that your position is in danger. Your margin balance is at a dangerously low level, and the market is close to triggering liquidation. In such a situation, immediate action is crucial. Rational steps would include adding additional margin or closing part of the position to reduce risk.
As a general rule, you should increase margin in a position before it reaches the "yellow" or "red" state. Proactive margin management will help prevent unexpected liquidations and give you greater control over your trades. Regularly monitoring these visual indicators, as well as keeping a close watch on your position's liquidation price, is key to effective and successful trading.
๐ Green, yellow, red: your guide for proactive risk control.