Understanding Liquidation in Futures Trading: Avoiding Costly Mistakes
One of the most common questions in trading is, “Why did I get liquidated?” The reality is simple—if you got liquidated, it’s because you allowed it to happen. Personally, I find futures trading straightforward, often easier than spot trading, and I’ve never been liquidated. Why? Because I approach the market with the intent to profit, not to fall into the traps set by the big players (whales/exchanges).
Why Traders Get Liquidated Despite Perfect Analysis
Even with sound technical analysis, chart reading, and market knowledge, traders still experience liquidation. The reason? The market doesn’t strictly adhere to technical patterns, trendlines, or support/resistance zones. Often, what drives the market is FOMO (fear of missing out), reinforced by the strategic actions of the big players. Markets typically move where the majority benefit lies, and occasionally, they align with our analysis to boost our confidence. However, it’s essential to realize that technical patterns are often a psychological framework, not an ironclad rule.
The Reality of Futures Trading on Binance
Many people view Binance as a casino, expecting to turn $100 into $1,000 overnight. While substantial gains are possible, it’s important to remember that not every trade yields a massive return. Success in futures trading boils down to one critical rule: manage your margin and leverage carefully.
The Key to Avoiding Liquidation
To prevent liquidation and consistently end trades in the green, follow a simple rule: limit your margin and leverage. Use no more than 0.5% of your wallet and a maximum leverage of 6x. Enter a long trade in a reliable asset, take your position, and if the price drops, apply a Dollar-Cost Averaging (DCA) strategy by adding only 1% of your wallet. This way, you maintain a “zero liquidation” approach, with your entry price nearing the breakeven point after each DCA.
When the market returns to your breakeven, remove any extra margin added during DCA to optimize your entry position and improve your margin management. If the market dips again, repeat this process, only adding DCA positions at a 1-day support zone. By adhering to this strategy, you increase your chances of closing trades profitably, as the market will eventually work in your favor