Under what circumstances will your forex account be subject to a forced liquidation?

When forex investors trade the foreign exchange market, some are short-term traders who may quickly close their positions just a few minutes or even seconds after placing an order to profit from price fluctuations; others are long-term investors who wait several days or even half a month after placing an order before closing their positions to profit from trends.Generally speaking, a single trend-based profit can far exceed the sum of multiple volatility-based profits. Therefore, a large number of investors hope to become long-term investors, as this allows them to earn more money while reducing the frequency of trades.However, in any forex trade, returns and risks are inevitably linked. As a long-term investor, the risk of a forced liquidation is far higher than that of a short-term investor with the same principal and the same position size. So what is a forced liquidation, and why do forex accounts sometimes face forced liquidation?This article will address these questions for you.

Before understanding forced liquidation, it is important to first understand the core mechanism of forex trading— margin trading. To make this easier to understand, let’s consider an example: Zhang San wants to trade forex and first deposits $1,000 into his forex trading platform account. Assuming the platform’s leverage ratio is 10:1, this means Zhang San can trade up to $10,000 in the forex market.If Zhang San directly trades $10,000 in the forex market and ultimately makes a profit of 10 pips—excluding commissions and other fees—he will earn $1,000, effectively doubling his principal;Of course, if Zhang San lacks the necessary skills or has bad luck and ends up losing 10 pips, his $1,000 principal will be completely wiped out.

In fact, based on the above assumptions, if Zhang San incurs a loss, the forex trading platform would still be taking on enormous risk; therefore, as a precaution, forced liquidation was introduced.Suppose the platform sets the maintenance margin ratio at 30%. This means that when Zhang San incurs a loss of 7 pips—leaving only 30% of his original principal—the system will require him to replenish his principal to $1,000; otherwise, a forced liquidation will occur—all of Zhang San’s open positions will be automatically closed out.

This type of forced liquidation causes immense harm to investors, which is why it is also referred to as a “margin call”; after all, before the margin call occurs, the loss is merely paper, but once it happens, the investor is truly left with nothing.

However, there is another scenario in which an investor’s foreign exchange account may be subject to forced liquidation but still generate a profit: forced liquidation resulting from the expiration of the product.Unlike a margin call, this type of forced liquidation primarily occurs in futures trading. When the futures contract an investor has purchased expires, the investor must close the position based on the final settlement price. If the investor has a long position and the settlement price is higher than the purchase price, the investor may actually realize a profit from this forced liquidation.

As mentioned above, forced liquidation of forex accounts generally falls into two categories: margin call and expiration. Regardless of the type of forced liquidation, experienced investors should do their best to avoid it.

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