Understanding the Liquidation Level

The liquidation level is a predetermined point at which an automatic liquidation process begins. The broker may issue a margin call first, so the liquidation level isn't reached. This differs from the "liquidation margin," which is the value of everything in an account should it be closed. Here's how it works:

Margin requirement: When you open an account that uses leverage, you must maintain a certain amount of money. This margin serves as collateral for what's borrowed.

Maintenance margin: The broker sets a maintenance margin level, the minimum amount of equity (account balance plus or minus any unrealized gains or losses) that must be maintained in the account to keep the positions open.

Margin call: Before reaching the liquidation level, the broker may issue a margin call, alerting you that what's in your account is fast approaching the maintenance margin level. You must then deposit more funds or close some positions to avoid liquidation.

Liquidation level: If the market moves against your positions and the amount in your account falls below the maintenance margin required, you might reach the liquidation level. At this point, the broker won't need your permission to close some or all of your open positions to prevent further losses for both you and them.