What does it mean to increase leverage to liquidate a position?

Leveraged liquidation refers to the situation that occurs when the loss exceeds the initial capital multiple in leveraged trading. Detailed explanation: 1. The use of leveraged trading allows borrowed funds to expand the size of the transaction and amplify potential profits and losses. 2. The leverage ratio indicates the multiple of borrowed funds. For example, the borrowed funds with 2 times leverage are twice the initial capital. 3. When the loss exceeds the multiple of the initial capital, a liquidation will occur, causing the trader to lose all initial capital and still need to repay the borrowed funds.

The meaning of leveraged liquidation

Leveraged liquidation refers to a situation that occurs when market price fluctuations cause losses to exceed the initial capital multiple of the leverage multiple when trading using financial leverage.

Detailed explanation

In financial transactions, leverage refers to a way of borrowing funds to increase the size of a transaction. Using leverage increases potential profits, but it also increases potential risks.

When trading with leverage, traders only need to put up part of their money as initial capital, with the broker providing the rest. The multiple of leverage indicates how many times a trader can borrow funds, for example, 2x leverage means a trader borrows twice as much as their initial capital.

Leverage magnifies the size of the transaction and also magnifies the potential profit. However, leverage also magnifies losses. Liquidation occurs when market price fluctuations cause losses to exceed the leverage multiple of the initial capital. At this point, the trader loses all initial capital but still has to repay the borrowed funds.

For example, if a trader buys $100 worth of stock using 2x leverage, his initial capital is $50 and his leveraged capital is $50. If the stock price falls by 5%, the trader's loss will be $2.50 ($100 2x leverage 5%). However, due to leverage, even a loss of only $2.50 would blow up the trader's position because it would exceed their initial capital of $50.

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