In any financial market and liquidation, it is sometimes better to pull out entirely than to continue trading or investing in that market. This is where the idea of account liquidation is involved. Whether you are in the stock market, the crypto market, or the forex market, the processes that are used for liquidating one’s account are pretty similar to one another.
In this article we want to take a look at the concept of account liquidation, the reasons some people decide to liquidate their account and the conditions that led them there, and also see how you can liquidate your account as a trader or investor in any financial market.
What Exactly Is Account Liquidation?
The meaning of account liquidation can be found to be different in different markets. In essence liquidation refers to the exchange of an asset into liquid asset. This means there ought to be a difference between a liquid asset and a non-liquid asset.
So what are liquid and non-liquid assets? A liquid asset is any form of monetary value that can be exchanged for other goods and services in a direct manner. It means liquid assets are spendable. You can directly spend it on things and purchase goods or services.
On the other hand, non-liquid assets are those that cannot be spent directly. These are assets that are inherently not spendable – at least not directly.
A clear example of a liquid asset is money – whether in the form of cash or credit. Money or currency is the most immediate form of a liquid asset. In fact, in almost all cases of liquidation, the end result is one form of currency or another.
At the same time, there are also clear examples of non-liquid assets. Basically, any asset that cannot be directly spent is non-liquid. This can be, for example, a property, real estate, bonds, stocks, options, etc.
So for instance, in the stock market, if you decide to sell all of your stock and turn it into money, that is a form of liquidation. Similarly, in the forex market if you decide to close all of your positions and withdraw your entire account balance, that is another form of liquidation.
Whenever this type of asset is turned into money, we can say that liquidation has taken place. There are many reasons why someone would decide to liquidate their assets. But before we discuss them, let’s discuss how you can increase and at the same time protect your account liquidity.
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How to Increase Your Account Liquidity?
There are several steps that you can take as a trader in order to increase the liquidity of your trading account. The most obvious answer would be to inject more assets into your account – i.e. deposit more equity into your account. While that may be an obvious answer, it is not always the best solution as we may not always have the chance or ability to deposit more. There are other ways that you can benefit from.
For instance, in the forex market you can keep your account liquid by managing your positions. Although, you need to know that liquidity has a slight variation and difference in meaning in different markets. For instance, in the forex market, liquidity basically refers to buying and selling currencies without much volatility in their prices. And one way you can ensure the liquidity of your account is to manage the positions that you have open in the market.
Another certain way that can help you increase the liquidity of your account is simply through profiting. If you are a skilled trader who can profit in the market, then you can also increasingly keep your account liquid. This is done by allocating a proportion of your profits to your account equity. In this way you should not withdraw all of your profits, rather reinvest some of them back into your trading account.
With a good understanding of the role of liquidity in trading, you can keep your account liquid at all times, which gives you extra security in the face of market fluctuations.
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How to Protect Your Account Liquidity?
Increasing the liquidity of your account is one thing. The other side of this equation has to do with protecting the liquidity that you already have.
First of all, make sure you spend enough time and effort on developing a winning trading strategy. This is basically the first step toward having a successful experience as a trader, and thus increasing your account liquidity while protecting it at the same time.
The other side of this would be to develop a proper risk management approach. If your trading strategy does not also entail a well thought-out risk control mechanism then you are just putting your liquidity at risk for no good reason.
Also keep in mind that to tweak and adjust your trading strategy whenever it is necessary in order to keep it up to the task.
Last but not least, always avoid unnecessary risks that could potentially put your liquidity at the risk of loss. While taking risks is good, and sometimes even needed for profiting, unnecessary and risk taking that is purely out of impulsive behavior is not advised.
When Should You Liquidate Your Account?
So when is it necessary to liquidate your position in any given market? There could be a countless number of reasons as to why a trader or an investor would decide to liquidate and pull out of the market. But perhaps the most important reason is fear of upcoming loss or downturn in the market.
This is what we see constantly in the stock market, where investors bring in a lot of liquidity to purchase a certain stock but then when it goes up they decide to pull out completely and liquidate. In fact, it is the skill of a good broker to keep a stockholder from wanting to liquidate and instead get them to reinvest their money into other stocks.
There could be still other reasons for account liquidation. For instance, it might simply be a necessity for liquid assets. Whatever the reason may be, liquidation is something that you might have to face at one point in your trading journey.
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Conclusion
Account liquidation refers to changing the status of your assets in a given market from non-liquid to liquid. This means, for instance, selling all of your stocks in the stock market and turning it all into money. There are various reasons for account liquidation, such as fear of loss, necessity for liquid assets, etc. In this article we discussed the concept of account liquidation and its different aspects.
