What is liquidation and when does it happen in leverage trading?

Liquidation occurs when a trader's leverage position loses so much value that their account balance can no longer cover the required margin. For example, if you borrow $1,000 to trade with 10x leverage but the position drops 10%, you lose your entire $100 deposit. Exchanges automatically close positions to prevent further losses. This happens because leveraged trades use collateral—borrowed money multiplies both gains and losses. A 5% price move against you with 10x leverage means a 50% loss. Liquidation protects exchanges from traders owing money they can't repay. Risk management strategies include setting stop-losses, using appropriate leverage ratios, and maintaining adequate account reserves.