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To begin with, let us consider long positions.
When a trader takes a long position, he believes that the price of the asset (for example Bitcoin, Ethereum or any other stock) will increase. Buying and holding are common practices for spot markets while traders often use leverage to open long positions in derivative markets such as futures or perpetual contracts by borrowing from exchanges.
Although leverage may increase profits, it also increases losses. This is where liquidation comes into play.
The Term “Long Positions Liquidated”
Liquidating long positions implies that traders who predicted an increase in prices were compelled to exit their trades due to adverse market movements. This is a usual occurrence in leveraged trading.
Every leveraged position is assigned a liquidation price. If the price of the asset reaches this point, then the exchange closes the position automatically so that no more money can be lost. The trader forfeits all or most of his posted margin.
In simple terms: prices fall down, those who took leveraged longs cannot cover their losses, and therefore the exchange stops them out.
Reasons for Rapid Liquidations
Liquidations are very common during sudden market shifts. A sudden sell-off, which may be instigated by economic data, regulatory news or huge sell orders can drive prices down rapidly. As the prices decrease, long positions begin hitting their liquidation triggers.
This may set off a chain reaction. Market sells are used to close liquidated positions thereby increasing selling pressure. This leads to further reduction in prices and subsequent triggering of more liquidations by traders; commonly referred to as “long squeeze.”
Where It Is Most Commonly Seen
The term “long positions liquidated” is highly prevalent in crypto derivatives markets where traders can access high leverage like 10x, 20x or even more. Billions of dollars worth of long positions can be liquidated within a day under high volatility according to market data providers.
It occurs in traditional markets too but with less intensity. Margin calls in stock trading operate on a similar basis although they take longer to unfold.
Massive liquidations may cause short-term volatility spikes and exacerbate price movements. They are often responsible for unexpected price drops occurring much quicker than anticipated even when there is no significant news update available.