Sign UpHow to Avoid Liquidation?
Intermediate
2024-11-14
For crypto traders, there are primarily two methods of mitigating the risk of liquidation in leverage trading.
Determine the risk percentage
The first method of avoiding liquidation involves the risk percentage. This method requires traders to make a decision on the amount of money they’re willing to allocate towards the trade. Additionally, traders must decide on the percentage of their trading account they're willing to risk. This is part of risk reduction. Many agree that traders should only risk 1% to 3% of their account per trade. If a trader risks only 1% of their account, they'd have to lose almost 100 consecutive trades to lose everything. Even in the crypto industry, this is highly unlikely.
Learn to stop-loss
The second option is to use a stop-loss strategy, which can significantly reduce the amount of money you'd lose if a trade was to move against your position. For example, you could set a stop-loss order at 5% under the entry price. If the market suddenly turns against your expectations, you'd only suffer limited losses.
This is an important part of risk management, especially when it comes to margin trading. Remember, the crypto market is a highly volatile environment and prices can plummet within minutes. If you're not focusing, you can easily miss your chance to exit your position safely. This is why risk mitigation is absolutely crucial for safe trading.
Estimated liquidation price
When a trader successfully opens a position, there will be an estimated liquidation price icon displayed as details of the position. Keep an eye on it and use stop-loss when necessary.
Be cautious with leverage
Although the potential for increased gains from leverage is an exciting prospect, it's important to use the tool wisely. Too much leverage can increase the risk of liquidation and threaten your open positions. Figuring out the correct leverage amount isn't an exact science, and there are a few factors to consider. First, understand your risk tolerance, which should be based on the amount of funds you're willing to (and can afford to) lose. Second, consider the current market volatility. A highly volatile market might not be the best time for high leverage, as major price swings could happen suddenly. Third, trust your trading strategy and follow it diligently. If your strategy demands a long-term position with low leverage, it's unwise to make a sudden and impulsive high-leverage trade in the hope of a quick gain.
The final words
Crypto is inherently volatile, meaning liquidation is a real possibility — especially when trading with leverage. Since liquidation can result in a loss of funds, traders of all levels would be wise to remain alert to the threat. The liquidation of a trade is usually executed by exchanges, which is why the process is commonly referred to as forced liquidation, especially when the liquidation risk is quite high and the maintenance margin ratio reaches a certain point.
With matured trading strategies, the risk of liquidation can be reduced, including using a stop-loss order and determining the risk percentage of a trade. Taking the time to understand and implement these risk management processes could save you from greater losses.
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