What Is Liquidation?
Liquidation is the forced closing of a leveraged trading position by the exchange when losses erode the margin (collateral) to a critical threshold. The exchange sells the position at market price to recover the borrowed funds, and the trader loses most or all of their deposited margin.
How Liquidation Works
Every leveraged position has a liquidation price — the price at which your remaining margin can no longer cover the position's losses. For a 10x long on BTC at $65,000 with $1,000 margin, the liquidation price is approximately $58,500 (10% below entry). If BTC drops to that level, the exchange forcibly closes the position.
Why It Matters for Traders
Liquidations are not just individual events — they're market-moving forces. Large clusters of liquidations at similar price levels create "liquidation cascades" where forced selling drives price further into more liquidation levels, creating a chain reaction. Tracking liquidation heatmaps reveals where these clusters sit, enabling traders to anticipate volatile moves and avoid being on the wrong side.