What Is a Cliff Crash
A cliff crash describes a rapid, steep decline in financial asset prices or economic indicators that happens over a very short period. It is often driven by panic selling, forced deleveraging, or the sudden withdrawal of liquidity. Unlike a gradual correction, a cliff crash can wipe out large portions of portfolio value in days or even hours.
Common Causes and Triggers
Key triggers include unexpected policy changes, sharp interest rate hikes, geopolitical shocks, or the collapse of a major institution. High leverage and crowded trades can amplify losses, as margin calls force additional selling. Automated trading and algorithmic strategies can further accelerate the downward move once selling pressure begins.
How to Prepare and Respond
Preparation starts with clear risk limits, diversification, and avoiding excessive leverage. During a cliff crash, investors should review exposure, avoid impulsive reactions, and focus on long-term goals. Monitoring liquidity and understanding margin requirements can help reduce the chance of forced exits at extreme prices. For background on market crashes and their effects, see Investopedia: Market Crash.
