How To Avoid Liquidation in the Futures Market
This is particularly for futures traders. If you trade the futures market then you should pay close attention because this discussion could be helpful in your journey in some ways. The one and only enemy of futures traders is liquidation. No futures traders want to be liquidated but I believe everyone at some points have been liquidated before. Trust me, it is usually not a pleasant experience and no one loves to experience it.
Yearly, monthly and daily, the amount of dollars being liquidated in the futures market only continues to increase. Billions of dollars get to be lost to the futures derivatives market in a process called liquidation. I believe that the rate at which futures traders get liquidated can be minimized. This can only happen by applying risk management strategies and also doing away with greed.
What is Liquidation?
Before defining liquidation, I think it's important to discuss what futures trading entails. Futures trading is a type of crypto trading that involves price predictions with access to leveraging. There are basically two ways you can trade in the futures market which are; longing and shorting.
To long a particular asset simply means that you are predicting a price increase while shorting means you are predicting that the price of the said asset will plummet. Hence, profits can be made both in a bull and bear market. Futures trading is very risky because you can either make crazy gains or you get to lose all your funds and this happens very quickly.
In the traditional market, liquidation is the process of converting assets to cash. However, the term has a very different outlook in the futures market. It means to get kicked out of a particular position or positions when your margin ratio becomes low and you can no longer pay the maintenance fee. Liquidation occurs when the price of a certain in-position asset hits the liquidation price.
In simple and plain terms, to get liquidated in the futures market means to lose all your funds. Liquidation call is usually triggered when your margin ratio is low. Equally, liquidation takes place when the mark price hits the proposed liquidation price. Liquidation price is that price at which liquidation takes place.
Let's make an example: Let's say you enter into a BTC/USDT long position at an entry price of $45k. Now, depending on your leverage level (between 1X to 125X), your margin and overall margin amount, you are being given a liquidation price of $38k. Liquidation can only take place if the BTC/USDT price falls to $38k. At that instance, you will be forced out of the long position involuntarily and all the funds in your futures trading account will vanish equating your account to zero.
This is usually the worst moment for a crypto futures trader. Now, how can you as a futures trader avoid liquidation? How can you keep your liquidation price very far away from your mark price? Briefly, I'll highlight some points that can help you play safe in the cryptocurrency futures market.
How To Avoid Liquidation in Futures Trading
Use Stop-Loss As the name implies, this feature allows you to take some loss while saving your overall wallet balance. Most exchanges have this feature and it is really helpful in stopping liquidation. Most times, you might not be monitoring the market when your trades go south. Stop-Loss allows you to set the maximum loss you can take in case trades go in the wrong direction.
Use Low Leverage Levels Leveraging can be both good and bad. It is good when trade goes as planned but bad when things go south. It can give mouthwatering gains but at the same time, a high leverage can always fasten your liquidation. Overall, it is best to keep your leverage level moderate.
Have a Profit Target A person with a Target in mind will definitely not be exposed to all dangers in the futures trading market. Whereas a trader with no target but just random trades will be exposed to dangers like liquidation.
Keep Your Emotions Outside Never trade based on how you feel but trade based on the market trend. It is important that you know the market trend and follow the trend as well.
Avoid Many Positions One thing that facilitates liquidation is entering into too many positions. When you enter into many positions, your margin ratio is being placed at risk thereby triggering liquidation at the sight of a market correction or pump depending on the nature of your trade.
Have a Strategy It is important that you come up with a strategy that works for you and then do well to stick to the strategy. Don't depend on people's strategies because what works for others might not work for you.
Final Words
Futures trading is highly risky hence, eerything taking about account safety boils down to risk management. As a futures trader, risk management should be your watchword. Don't let greed for profits expose you to the danger of liquidation. Manage and control your risks as this will enable you last longer in the market. Remember, it is not how much you make but how much you keep.
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