👉When participating in the futures market, you have probably heard at least once about an account being burned or an account being liquidated. Maybe you too have had your account burned and received a liquidation email from Binance. I will have a few things to confide in you. Today, $BTC is going to collapse strongly, not only the main coin traders but other alts will also be affected very strongly, so let's learn about the possibility of being liquidated. The ability to allocate capital, take profit points and stop losses with me.
What is a Futures account?
Margin or margin trading is often used by investors to borrow money from exchanges (for example, Binance). This is a form of financial leverage. Accordingly, investors can use leverage to increase their position. This will help investors optimize capital resources to increase profits.
What is liquidation in futures trading?
Traditionally, liquidation is a term that simply means converting assets into cash. In futures trading, liquidation is something to avoid as much as possible. When engaging in futures trading, losing positions are forced to find a way out to prevent traders from falling into negative equity. Leveraged positions are susceptible to price fluctuations which can cause the trader's equity to drop to a negative balance in an instant. In these situations, losses can be greater than the sustained margin. As a result, the losers are liquidated. This process is involuntary and occurs automatically if the transaction meets specific price criteria.
Contract liquidation occurs quickly or slowly depending on the amount of leverage used in a transaction. For example: With a low amount of leverage, liquidation will not have to happen as soon as the market has a small correction. Conversely, high amounts of leverage can deplete a trader's initial investment without a single impact.
When does contract liquidation occur?
Forced contract liquidation occurs when an investor or trader is unable to meet the margin requirements of their leveraged position.
For example, an investor opens a trade with a long position of 100 USD and has leverage in BTC/BUSD. The leverage the player uses is 20x, making the position worth $2,000. If the price of BTC drops just 5%, investors will completely wipe out their initial deposit of $100. If margin requirements cannot be met to keep trading going, the investor's position is at risk of liquidation.
Although this is a basic example, it is important that users know their limits, how much they are willing to lose on a trade, and be strategic with leverage. This is especially true with cryptocurrency volatility. This is why Binance introduced leverage limits for new accounts to protect new users from the dangers and unwanted consequences of using high leverage.
Binance believes that all of its customers should fully understand the impact of leverage and the situations in which leverage can cause major trading losses. Binance also believes that allowing excessive leverage is not beneficial for customers, for Binance, or for the market.
Three tips to prevent contract liquidation
There are many ways for users to avoid contract liquidation. Investors should remember that losses on trades are always possible but liquidation is not always possible. People can use available tools to help prevent this and consider smarter trading strategies, like monitoring margin or using lower leverage.
1. Use stop loss orders (Stop Loss)
The clearest and simplest answer in avoiding liquidation is to use stop loss orders. Stop loss is a tool that most exchanges offer, allowing traders to set sell prices automatically. If the asset's price drops to or above this predetermined price, the system automatically processes it for the trader. By using stop loss orders in conjunction with a liquidation calculator, traders can protect their capital from total loss, especially from liquidation.
While investors may still lose some money, the stop loss tool protects against losing everything on the trade and avoids having to pay liquidation fees. No player wants to both lose money and be penalized for it. They can prevent this from happening by using stop loss orders.
2. Use less leverage
Leverage has a significant impact on the longevity of a trade. While using a high amount of leverage can provide attractive profit opportunities, a low amount of leverage is always a safer route. Using high leverage can really give you a big win however, it can also add to your losses.
As shown above, high amounts of leverage can harm the trader even when small price changes occur. Using lower leverage will help you navigate the volatile cryptocurrency market smoothly and safely.
3. Monitor margin rate
Another option that traders can take is to monitor the margin ratio. Your position will be liquidated when the margin reaches 100%. To avoid this from happening, traders can add more margin to the trade and reduce their position (return leverage). This method is similar to keeping a position alive when the ratio is close to 100% (when the trade goes further in the wrong direction).
Players can choose to add more margin or reduce leverage to avoid contract liquidation as they are generally similar to trading with less leverage in the first place. The difference is that maintaining a specific margin can be done over longer periods of time and is a more dynamic solution.
Advice :
Contract liquidation (account burning) is a scary term that traders always avoid. The good news is that traders have a number of trading tools and strategies that can be implemented to avoid liquidation. From stop losses to liquidation calculators, using appropriate leverage and monitoring margin, proper capital allocation helps traders still have plenty of resources to avoid liquidation.
Contract liquidation is just one of the things that traders need to keep in mind when learning how to trade cryptocurrencies. If investors want to learn more about this space, Binance offers everything you need to trade effectively. Additionally, Binance is also available as a source for trading best practices, trading terminology, and trading tools.
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