As long as it is a foreign exchange trading friend, there are few who have not experienced a foreign exchange liquidation. Only those who have experienced it can experience the pain. For newcomers to foreign exchange investment, the word “explosion” is both daunting and a bit unclear. So what does a foreign exchange liquidation mean?
The so-called blow up an account (called blow up an account in English) refers to the fact that the investor’s account has lost too much money, and the balance and margin in the foreign exchange account are not enough to cover the loss. The foreign exchange dealer’s system performs a check on the position in the account. A process of forced liquidation (or “liquidation”). Before liquidation, your account holding losses are only floating losses. After liquidation, it becomes an actual loss, and your account principal becomes basically 0.
Foreign exchange dealers often judge whether to close positions based on a ratio. This ratio can be easily viewed in the MT4 trading software, namely: the prepayment ratio (also called the liquidation ratio). The prepayment ratio is determined by each dealer, and it may usually be in the range of 0~200%.
It should be noted that when trading stocks or futures, if your account is about to close out, or there is a greater risk of liquidation, you will often receive a reminder call from the dealer to remind you to add margin. This is called a margin call. However, in foreign exchange transactions, generally no one will call you to remind you, so you must pay close attention to the changes in the account’s prepayment ratio.
If the margin ratio is equal to or lower than the liquidation ratio, the broker will quickly close all your open positions to protect against greater losses. This method of closing a position is called a liquidation.
Remember, liquidation is not random. Once the liquidation process starts, it is usually impossible to stop because the process is automatic. Even if you yell on the phone, the platform’s customer service team may be unable to stop it.
What is a foreign exchange liquidation? What is the margin call ratio?
For example, if the dealer’s liquidation ratio is 20%, it means that if your margin ratio reaches 20%, the platform will automatically close your position.
Liquidation ratio = margin ratio 20%
So what is the margin call ratio?
When the margin ratio reaches 100%, you have received a margin call notice, but you still decide not to deposit because you think the market will turn.
You are not only a bad trader, but also a crazy trader. A bad crazy trader. Anyway, you ended up completely wrong, and the market continued to fall.
You have fallen 960 points. Based on 1 point and 1 USD, your current floating loss is 960 USD.
This means that your net worth is now $40: net worth = balance + floating profit and loss, that is, $40 = $1000-$960
At this time, the margin ratio is 20%: margin ratio = (net value/used margin) x 100%, that is, 20% = ($40 / $200) x 100%
At this time, your position will be automatically closed. When the position is closed, the “locked” used margin will be released and become “free margin”.
The final result will make you very frustrated. Your floating loss of $960 will be “realized”, and your new balance will be $40! Since you do not have any open trades, your equity and free margin will also be $40.
The following are the indicators of your account under different margin thresholds:
The picture below is the expression of your account after experiencing a liquidation…
If you have multiple open positions, the broker usually closes the least profitable position first.
“Release” the used margin for each closed position, which will increase your margin ratio. However, if closing the position is not enough to obtain a margin ratio of more than 20%, the broker will continue to close the position until this level is reached.
The significance of the liquidation ratio is to prevent your loss from being greater than the deposited funds. If your order continues to lose money, and no further funds are deposited in your account, your account balance will eventually become negative. The broker is unwilling to urge you to fill up the unpaid balance, so it sets a liquidation ratio to try its best or prevent your balance from becoming plural.