Liquidity Crisis

A lack of (or non existence of) buyers, often causing as a negative feedback loop, where the lack of buyers causes prices to drop, which causes panic sells, which causes the price to drop further, which scares off buyers, and so on.

Why it matters

While liquidity crises are rare, they are arguably the most dangerous situation a trader using leverage or oversized positions can find themselves in. A liquidity crisis is the most extreme form of slippage. You have little to no control over the fate of your position. If you happen to be a seller in a liquidity crisis, by nature, you're in for a ride whether you like it or not.

How to mitigate risk in a liquidity crisis

1. Pick the right securities - Securities with high volume are less likely to experiance crises as there is simply more liquidity.
2. Position Size - Never enter a trade with more than you are willing to lose.
3. Avoid leverage - Leverage means you are risking more then you have. This can be catastrophic. Please, for fucks sake, avoid leverage.