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

“If you fail to plan, you plan to fail.” 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 Level’s 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. Binance’s 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 – 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 Thoughts 

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

Disclaimer and Risk Warning: Digital assets are subject to high market risk and price volatility. The information provided does not constitute, in any way, a solicitation or recommendation or inducement to buy or sell the products. The value of your investment may go down or up, and you may not get back the amount invested. Comments and analysis do not constitute a commitment or guarantee on the part of Binance. You are solely responsible for your investment decisions and Binance is not liable for any losses you may incur. Past performance is not a reliable predictor of future performance. You should only invest in products you are familiar with and where you understand the risks. You should carefully consider your investment experience, financial situation, investment objectives and risk tolerance and consult an independent financial adviser prior to making any investment. This material should not be construed as financial advice. This product may not be available in certain countries and to certain users. This content is not intended for users/countries to which prohibitions/restrictions apply. For more information, see our Terms of Use and Risk Warning. To learn more about how to protect yourself, visit our Responsible Trading page.