Avoiding Position Liquidation - It's Costly
🔵A straightforward thought, yet some people still ignore it. Let's delve deeper into the phenomenon of liquidation and why it's essential to avoid it.
🟣The immediate answer lies in the definition; avoiding liquidation is necessary because it means losses. The market has shifted unfavorably, there are no more assets to support the losing position, and it's forcibly closed.
🟣But today, let's discuss other aspects.
✔️ Additional Costs
Position liquidation on most exchanges involves fees, and in some cases, slippage. Potentially, you could have retained at least the collateral, but during liquidation, you risk completely wiping out your deposit.
During significant moves against your position, if the margin isn't enough to maintain it, your position starts to get liquidated. If it's substantial, and you're holding a small coin or experiencing intense movement, you face slippage at market closing plus additional maker fees.
And already significant losses increase even more.
✔️ When Liquidation Occurs
- When leverage is used and there's not enough margin to support the position, whether in futures or margin trading.
- In crypto loans, when collateral falls below the established norm (in this case, you'll be closed at zero).
✔️ Your Position Could Close at a Much Worse Price Due to Exchange Functionality
On some exchanges, there's protection against price squeeze. If the price hovers in the liquidation zone for a specific time, the trade won't close. Consequently, if it's not a squeeze, you'll be closed at a much worse price than the potential liquidation price, leaving little in terms of collateral.
