Strategies to Minimize Liquidation Risks in Margin Trading
Main Takeaways
Liquidation happens when a trader's margin level drops below liquidation thresholds. Monitoring your margin level closely is therefore critical to avoiding liquidation.
Having a trading plan and following it consistently can help you avoid making impulsive decisions, thus reducing the risk of liquidation.
To further minimize liquidation risks, you can use strategies like stop-loss orders, set a custom margin call ratio (MCR), and enable auto top-up.
While margin trading can boost your gains, it can result in greater losses if the market moves against your position, especially if your collateral doesn't meet the margin requirements. In this case, liquidation will occur as Binance will have to close your positions. To help prevent this, it is essential to plan ahead and manage your risks.
In this article, we'll explore various tools and strategies to help you minimize liquidation risks in margin trading.
Set up a Trading Plan
âIf you fail to plan, you plan to fail.â Setting up a clear trading plan and defining your profit and loss expectations is essential for success. Developing a solid stop-loss strategy is also effective in reducing the risk of liquidation. Furthermore, you can make use of margin parameters such as entry price and liquidation price from the position tab to better set up your trading plan.
Proper planning, discipline, and timely execution will go a long way to prevent impulsive decisions or debilitating inaction caused by emotions that could play to your disadvantage.
Monitor the Margin Level
Other than setting up a trading plan, it is of utmost importance to monitor your Margin Level, as it is a key indicator of risk. On Binance, Margin Level is categorized into healthy, low-risk, medium-risk, and high-risk.
When your Margin Level drops too low, you will no longer be able to borrow or trade, and you will receive a margin call notification. Liquidation may follow if you fail to actively reduce or top-up your position. The best way to prevent this is to always monitor your Margin Levelâs health status.
Set up Stop-Loss Orders
Unlike the stock market, cryptocurrency markets operate 24/7, which means that unexpected volatility can occur during periods of lower liquidity. Binanceâs multiple-order modes such as stop-limit or One Cancels the Other (OCO), which automatically place an order when the price meets your desired conditions, will help you sleep easy. If things do not go as expected, using stop-loss orders helps you keep our losses within your preset range.
Customize Your MCR (Margin Call Ratio)
When your Margin Level drops below margin call thresholds, the system will send you a margin call notification â a reminder for you to reduce or top-up your positions.
Yet sometimes, drastic price changes can cause the Margin Level to hit the liquidation ratio instantly, leaving virtually no time for you to take action. Binance allows users to customize the margin call ratio within a certain range. Setting a higher margin call ratio gives you more time to respond and reduces the risk of liquidation.
Enable the Auto Top-up Function
When the Margin Level drops, topping up your position promptly can reduce the risk of forced liquidation. Binance offers an automatic top-up function to make this tool work for you with maximum efficiency.
The auto top-up function automatically transfers funds from your Spot wallet to your Margin wallet when the Margin Level drops to a specified ratio. This feature helps maintain a healthy Margin Level and reduces the risk of liquidation. To learn more about this feature, refer to this FAQ.
Closing ThoughtsÂ
Understanding the risks and knowing what strategies to deploy to manage them are key to successful margin trading. A clear trading plan and the discipline to execute it, along with a thorough understanding of how liquidation works will go a long way in reducing the risk of liquidation. Explore our FAQ, Blog, Terms of Use, and other resources available on Binance to get a better understanding of the product.
Further Reading
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