How can you use the liquidation price calculation to improve your trading strategy? (2024)

FAQs

How does liquidation work in trading? ›

The liquidation level helps manage risk and was developed to protect traders and dealers from significant losses beyond a preset limit. When a trader's account funding reaches the liquidation level, all positions the trader holds will automatically close at the best available rate.

Maximizing the value of assets is critical when it comes to liquidation. By selling assets at the right time, marketing them effectively, understanding their value, bundling them, or even donating them, you can ensure that you get the best return on your investment.

Liquidation value can be calculated by removing the value of all assets and liabilities of a company from its financial report. The subtraction of liabilities from assets will give investors the liquidation value.

Liquidation price is the price at which a position will start going into liquidation. There are several factors that can influence this threshold, including the leverage used, the maintenance margin rate, the cryptocurrency's current price, and the trader's remaining account balance.

Liquidation Price: The level where your leveraged trade gets forcibly closed to prevent further losses. It's the point of no return, wiping out your entire account. Stop Loss Price: A predetermined level to automatically close your leveraged position, aiming to limit or prevent potential losses.

A trader might voluntarily liquidate a position in a stock when they believe the stock has reached its peak potential. For instance, if a trader bought shares at $50 each and the price rises to $70, they might decide to sell (liquidate) their shares to realize the profit.

Liquidation is typically an option if your business is insolvent and can't pay its bill or debts. When your business is liquidated, any remaining assets are paid to creditors and shareholders. Liquidation can also be a voluntary option.

Examples of Liquidation Strategy

Another example is Toys “R” Us. In 2017, the company filed for Chapter 11 bankruptcy and decided to liquidate its assets to pay off its debts. The company closed down its remaining stores and sold off all its assets to pay its creditors.

In case of a price drop, please ensure that you have enough margin balance in your futures account. The higher the margin balance you have, the lower the liquidation price. You can use the Binance Futures Liquidation price calculator to calculate how increasing your wallet balance will lower the liquidation price.

Liquidation

This is a common exit strategy for failing businesses. Liquidation is one of the most final exit strategies, whereby the business is closed down and all assets sold off. Any cash earned must go toward paying off debts and shareholders (if there are any).

What is liquidation value with an example? ›

Liquidation value is the total worth of a company's physical assets if it were to go out of business and its assets sold. Liquidation value is determined a company's assets such as real estate, fixtures, equipment, and inventory.

Orderly liquidation: In an orderly liquidation, assets are sold piecemeal over a reasonable period of time to maximize proceeds. Forced liquidation: Forced liquidation value assumes assets will be sold as quickly as possible, possibly in an auction.

For a liquidation analysis, the output is based on the dollar value of assets belonging to the debtor and recovery rate assumptions of those assets as a percentage of their book value. On the other hand, a “going concern” valuation is a function of the projected enterprise value of the post-reorganization debtor.

The liquidation value is obtained by subtracting company's liabilities from its assets. Receivables are often sold for 80–90% of book value. Inventories liquidation value is often based on 80–90% of the book value, depending on the degree of obsolescence and condition.

Liquidation in futures trading occurs when the value of a trader's position falls to a certain threshold called the liquidation price. If the market moves against the trader's position and reaches or surpasses the liquidation price, the position is automatically closed by the exchange.

The “margin liquidation level” is the margin level at which an automated liquidation process will occur. The margin liquidation level is approximately 40%, although the exact threshold varies in accordance with the price volatility in applicable markets. Reaching this threshold will trigger the liquidation process.