Contract liquidation overnight to zero? Three major risk pitfalls investors must know and a self-rescue guide

Cryptocurrency prices soared by 15%, futures gaps hit the daily limit down, and forex slippage directly liquidated positions… The market is constantly playing out investors’ worst nightmares. And the scariest part isn’t the loss itself, but the contract liquidation that brings “instant zeroing” — you not only lose all your funds, but may also be pursued for debts. Why does liquidation happen? Why is high leverage particularly dangerous? How can you avoid stepping on these landmines?

The Truth About Contract Liquidation: The Moment Margin Disappears

Contract liquidation simply means: you bet on the wrong direction, and your losses reach the point where you can’t even cover the remaining margin, causing the system to forcibly close your position.

When you engage in any leveraged trading, the broker requires you to deposit a certain percentage of margin as a “risk guarantee.” For example, if you use 100,000 yuan of capital with 10x leverage for futures, you’re effectively controlling a 1 million yuan position. If the market moves against you by 1%, you lose 10% of your capital; a 10% adverse move will wipe out your margin and may trigger a margin call. When your account equity falls below the broker’s minimum margin requirement, the system will automatically liquidate your position — this is contract liquidation.

Why does liquidation happen? Two core reasons:

• Trading in the opposite direction of the market, continuously losing
• Margin ratio falls below the maintenance margin, leading to forced liquidation

The Five Major Landmines of Liquidation, Most Commonly Tripped By Investors

Landmine 1: Over-leveraging

High leverage is like a double-edged sword, amplifying both gains and losses. Many people are confident they can control risks, but market changes often exceed expectations. A seemingly small adverse move, combined with high leverage, can instantly evaporate your principal.

Landmine 2: Holding onto “It’ll rebound soon” mentality

A common fatal mistake among retail traders — during a gap-down plunge, they prefer to hold their positions rather than cut losses. The result is not a rebound, but an immediate market order liquidation at the open, with losses far exceeding expectations.

Landmine 3: Not accounting for hidden costs

Day trading forgets to account for overnight margin requirements, options sellers face volatility spikes requiring additional margin… These small costs often eat up your entire account when you’re not paying attention.

Landmine 4: Liquidity traps

In less popular assets or during night trading, bid-ask spreads are huge. You want to set a stop-loss at 100 yuan, but the market only has buyers at 90 yuan, leading to a severe loss.

Landmine 5: Black swan events

Pandemics, wars, major policy changes… During continuous limit-down days, even brokers can’t close positions. Margin is wiped out, and you still owe money, facing the risk of being forced to cover.

The Risk of Contract Liquidation Varies Across Different Assets

Cryptocurrency contracts are most prone to liquidation

Crypto markets have the highest volatility, with Bitcoin experiencing 15% daily swings being common. Once liquidated, not only does your margin vanish, but the coins you bought are also wiped out. This is the riskiest asset class of all.

Forex margin trading: Playing with small money to make big money

Many investors prefer high leverage in forex because it requires less margin. But this is also the easiest way to lose control.

Margin calculation: Margin = (Contract size × Lots) ÷ Leverage

Example: Placing a 0.1 lot order on a currency pair worth $10,000 with 20x leverage Required margin = 10,000 ÷ 20 = $500

When the account prepayment ratio drops to 30% (platform standards vary), the broker will forcibly close the position.

Stock margin trading and day trading: Can also lead to liquidation

• Cash trading: 100% owned funds, safest, no liquidation risk
• Margin buying stocks: Borrowed money from broker, maintenance ratio below 130% triggers margin call, a 20% drop in stock price can trigger liquidation
• Failed day trading: Not closing the position results in overnight holding, and a gap-down limit can lead to forced liquidation

Three Tips to Prevent Liquidation: Risk Management Tools Are Life-Savers

Tip 1: Always set stop-loss and take-profit

Stop-loss( and) stop-loss( set automatic sell prices; when losses reach the set price, the system sells automatically, preventing losses from snowballing. Take-profit) and( profit-taking) set automatic profit targets; when reached, they lock in gains.

These two functions are the first line of defense against liquidation.

Risk-reward ratio = (Entry price - Stop-loss price) ÷ ###Take-profit price - Entry price###

Use $1 risk to aim for $3 profit — only then is it worth taking the trade.

Tip 2: Percentage-based method — simple and direct

New traders don’t need to analyze support and resistance levels. Just set stop-loss and take-profit at 5% above or below the entry price. Simple and clear — stop when needed, profit when possible.

Tip 3: Negative balance protection isn’t a cure-all

Regulated exchanges offer negative balance protection, meaning you can lose at most your account balance and won’t owe the broker. But this doesn’t mean you can freely go all-in with leverage — some brokers will proactively reduce leverage before major market moves. This protection mainly gives beginners room for mistakes.

Final Advice

Investing involves profits and losses, especially in contract trading. Before entering leveraged trading, fully understand the risks, make good use of stop-loss and take-profit tools, and never believe “this time it will rebound.” The market’s cruelty isn’t just in its volatility, but in the fact that it won’t give you a second chance to recover.