Contract trading is a high-risk, high-return investment method. However, due to its leveraged trading characteristics, contract trading is also prone to liquidation. So, what are the reasons for contract liquidation?

1. Insufficient funds: When the funds in your margin account are insufficient to pay the maintenance margin at the current market price, a contract liquidation will occur.

2. Market volatility: Sharp market fluctuations will affect your margin account. If the price reverses sharply, your leveraged position may be forced to close.

3. Strategy error: The investor’s investment strategy may not be optimal, and operational errors may lead to contract liquidation.

4. Uncontrollable risk events: Black swan events (such as large-scale network failures or large-scale power outages) and gray rhino events (such as political crises and terrorist attacks) will cause market fluctuations and lead to contract liquidation.

How to avoid liquidation in contract trading?

Avoiding contract liquidation is an important issue that every contract trader should pay attention to. Here are some ways to help you reduce losses caused by contract liquidation:

1. Careful risk management

Contract trading is a high-risk investment behavior. Before trading contracts, you should develop a detailed risk management plan. This plan should include your expected risks, possible black swan events, and a detailed plan for solutions. In this way, if the market encounters unexpected situations, you will have an expected solution.

2. Allocate funds reasonably

Diversifying your investment can effectively reduce risk and avoid contract liquidation. You should allocate funds prudently to ensure that no single asset in your portfolio exceeds 25% of the total funds.

3. Control leverage ratio

Controlling the leverage ratio is one of the important ways to avoid contract liquidation. A suitable leverage ratio can balance returns and risks. Generally, the leverage ratio before contract trading should be less than 5 times, which can effectively reduce risks.

4. Stop loss in time

When trading contracts, you should clearly define the stop loss point and execute the stop loss in a timely manner. This will allow you to cut off unfavorable transactions in a timely manner and reduce losses.

Summarize

Careful risk management, reasonable allocation of funds, control of leverage ratio and timely stop loss are important ways to avoid contract liquidation. Investors should always pay attention to market dynamics and understand market risks to strengthen their risk management capabilities and reduce the probability of contract liquidation.