Key points to remember

  • Liquidation occurs when a trader's margin level falls below the liquidation thresholds, so it is essential to monitor your margin level closely to avoid it.

  • Developing a trading plan and following it closely can help you avoid making impulsive decisions, which will reduce your risk of liquidation.

  • To further reduce your liquidation risks, you can adopt strategies such as Stop Loss orders, set a custom Margin Call Ratio (RAM), and enable auto-funding.

Margin trading can certainly multiply your profits, but it can also lead to even greater losses if the market moves against your position, especially if your collateral does not meet the margin requirements. In this case, Binance will have to close your positions: this is called liquidation. To avoid this, you need to plan your actions in advance and manage your risks.

This article reviews several tools and strategies that will help you minimize liquidation risk when trading on margin.

Prepare a trading plan

“He who does not plan, plans his failure.” Developing a clear trading plan and defining your expected profits and losses are the keys to your success. A solid Stop-loss strategy also helps to effectively reduce your liquidation risk, and you can also use margin parameters such as Entry Price and Liquidation Price from the Position tab to fine-tune your trading plan.

Careful planning, strict discipline and timely execution will go a long way in combating impulsive decisions or paralysis caused by your emotions, which could work against you.

Monitor the margin level

Besides preparing a trading plan, you should definitely monitor your margin level, which is a key risk indicator. On Binance, margin level can be classified as Healthy, Low Risk, Medium Risk, and High Risk.

When your margin level is too low, you will no longer be able to borrow or trade and you will receive a margin call notification, which may be followed by a liquidation if you fail to actively reduce or fund your position. The best way to avoid this is to constantly monitor the status of your margin level.

Setting up Stop Loss Orders

Unlike the stock market, crypto markets remain open 24/7, which means unexpected volatility can occur when liquidity is lower. Binance’s multiple order modes, such as Stop Limit or OCO (One Cancels the Other), which automatically place an order when the price meets the desired conditions, give you peace of mind when trading. In case of an unexpected situation, Stop Loss orders help you keep your losses within the predefined range.

Customize your Margin Call Ratio (RAM)

When your margin level falls below the margin call thresholds, the system sends you a margin call notification reminding you to reduce or fund your positions.

However, there are times when drastic price changes instantly bring the margin level to the liquidation ratio and leave you with almost no time to act. Binance allows users to customize the margin call ratio to a certain range. By setting a higher margin call ratio, you will have more time to react to the call and reduce your liquidation risk.

Enable the automatic provisioning feature

When margin levels decrease, quickly funding your position can reduce the risk of forced liquidation. Binance offers an auto-funding feature for maximum efficiency.

The Auto-Funding feature automatically transfers funds from your Spot Wallet to your Margin Wallet when the margin level reaches a specified ratio. This feature helps maintain a healthy margin level and reduces liquidation risk. To learn more about this feature, refer to this FAQ.

Conclusion 

Understanding the risks and knowing the strategies to manage them are the keys to successful margin trading. By developing a clear trading plan and maintaining the discipline to execute it, and by understanding the liquidation mechanism, you will be able to significantly reduce your liquidation risk. Refer to our FAQ, blog, Terms of Use and other resources available on Binance to better understand this product.

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