**Understanding Liquidation in Trading**

**What is Liquidation?**

Liquidation is a critical concept in trading, especially when leverage is involved. It occurs when a trader's position falls below a specific level, known as the liquidation price. At this point, the exchange automatically closes the position to prevent further losses.

**The Purpose of Liquidation**

Liquidation serves as a risk management mechanism for both traders and exchanges. By closing positions that have reached or exceeded the liquidation price, exchanges ensure that traders cannot lose more than their initial investment or margin deposit.

**The Process of Liquidation**

During liquidation, the exchange sells off the trader's assets to cover any outstanding debts or margin requirements. This process can result in partial or complete loss of the trader's assets, depending on market conditions and the size of the position.

**Risk Management for Traders**

To avoid liquidation, traders must monitor their positions closely and set appropriate stop-loss orders. Understanding the mechanics of liquidation and its implications is essential for navigating the complexities of trading and protecting one's investment capital.

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