Summary
- Risk Management: Contract trading involves high risks, so a detailed risk control plan is essential.
- Capital Management: Proper fund allocation reduces risk and prevents liquidation.
- Control Leverage: Adjusting the leverage ratio is key to avoiding liquidation.
- Set Stop Losses: Though more challenging than taking profits, stop losses are crucial for avoiding significant losses.
What is Contract Liquidation?
Contract liquidation occurs when market volatility causes your account’s margin to fall below the required maintenance level, leading the platform to automatically close your positions and clear any losses. This process can be explained by the following formula:
- Margin Rate = (Account Equity + Unrealized P/L) / (Contract Value × Leverage)
When the margin rate falls below the required maintenance margin, the forced liquidation mechanism is triggered, and the system will close positions at the best available market price. In highly volatile markets, the liquidation price may be much lower than expected, causing more significant losses.
Common Causes of Liquidation:
- Heavy Positions: Large position sizes or excessive leverage expose you to higher risks, increasing the likelihood of liquidation when the market fluctuates.
- No Stop-Losses: Some users avoid setting stop-losses to capture possible rebounds, which prevents them from controlling losses in time.
- Overconfidence: Traders who refuse to accept losses in unfavorable market conditions and continue to hold or add positions risk further enlarging their losses.
How to Avoid Liquidation:
1. Control Leverage
The higher the leverage, the greater the risk of liquidation. Keep leverage low, generally below 10x, especially if you’re new to contract trading. Lower leverage minimizes the chance of losing significant amounts during market volatility.
2. Set Stop Losses
Stop-loss orders are essential for every trade. They help automatically close positions when prices fluctuate sharply, limiting potential losses. For instance, set a stop-loss based on a manageable loss percentage so that you can exit promptly during unfavorable market conditions.
3. Capital Management
Manage risk by adjusting the size of each position. A common strategy is to limit each trade to 5–10% of your total account value. By doing this, a few losing trades won’t wipe out your entire account.
4. Diversify Investments
Avoid putting all your capital into one position. Diversifying spreads your risk across multiple trades. BitTap’s isolated margin mode is also a useful tool, allowing each position’s risk to be managed separately to avoid one position’s liquidation affecting the entire account.
5. Add Margin
If your position is nearing liquidation, adding more margin can help maintain the position and prevent forced liquidation. This can help keep your trades secure during large market fluctuations.
Conclusion
Liquidation is one of the biggest risks in contract trading, but it can be mitigated through prudent use of leverage, stop-loss orders, proper capital management, and adding margin when necessary. No matter how the market moves, traders should follow sound risk management strategies to make informed decisions and achieve steady returns in high-risk contract trading.
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