There are many things to consider before you start trading cryptocurrency futures.rules and probabilities. However, the main rule of success is a carefully thought out strategy for each trade and the calculation of capital at risk.
When trading futures on cryptocurrency assets,traders can use leverage, so it is especially important to know how much capital and leverage is involved in a transaction. This will allow you to analyze the total amount of risk. This information is very important because in some cases losing trades can be liquidated.
What is Cryptocurrency Futures Liquidation?
Traditionally, “liquidation” means the conversion of assets into cash. In Bitcoin futures trading, liquidation should be avoided as much as possible as the market is extremely volatile.
When trading cryptocurrency futures, unprofitablepositions are forcibly closed in order to avoid a negative balance on the trader's account. Leveraged positions are affected by volatile prices, which can quickly cause a trader's account balance to go negative.
In such cases, losses may be greatermaintenance margin. As a result, losing trades are liquidated. This happens automatically and compulsorily if the transaction begins to meet certain price criteria.
Elimination occurs slowly or quickly, depending ondepending on the amount of leverage in the transaction. So, with low leverage, liquidation will not occur if a minor correction occurs in the market. Conversely, high leverage can quickly drain traders' initial investments.
When does the liquidation mechanism start?
A forced liquidation process will be triggered if an investor or trader no longer meets the margin requirements for leveraged positions.
Let's take a simple example.Let's say you want to open a $ 100 trade in a leveraged BTC / BUSD long position. You have 20x leverage, so your position is worth $ 2,000. If the price of BTC falls by only 5%, it will completely wipe out the initial $ 100 margin. The margin call requirement to save the trade will not be met and the position will be in danger of being liquidated.
This is a simple example.However, it is important to understand your limits, understand how much you are willing to lose in a deal, and strategically use leverage. This is especially important when you are dealing with volatile cryptocurrencies. As such, we have set a leverage limit for new accounts to protect new users from the effects of high leverage.
Crypto exchange Binance believes that all customersshould fully understand how leverage works and be familiar with the circumstances in which it can significantly reduce the likelihood of profitable trading. Find out more about ways to reduce liquidation risk in our resource materials.
Three ways to prevent liquidation
There are ways to help you avoid liquidation. Traders should remember that losses in transactions are always possible, and they do not have to be accompanied by liquidation.
There are simple tools that canprevent this scenario, as well as useful trading strategies that include controlling margin, using stop loss orders, or reducing leverage.
Use stop loss
The most obvious answer to the question of how to avoid liquidation is to set a stop loss above the liquidation price.
Stop loss is a trading tool available onMost exchanges that allow traders to set a price to automatically sell if the price of an asset falls to or rises above a set price. Stop loss combined with a liquidation calculator allows traders to protect funds from losses, especially from liquidation.
Of course, you may lose some of yourfunds, but a stop loss will protect you from losing your entire capital and from having to pay a liquidation fee. Who wants to lose money and also pay a fine for it? Stop loss allows you to avoid this scenario.
Reduce your leverage
Leverage has a significant impact onduration of the transaction. High leverage may seem very attractive, but low leverage is always safer. High leverage can really bring some serious profits. However, it can also increase losses.
We have already said that high creditLeverage can harm a trader even with a slight change in price. Using low leverage will help you trade easily and safely in the volatile cryptocurrency market.
Keep track of the margin ratio.
Another opportunity for traders is related tomonitoring of the margin ratio. If the margin ratio reaches 100%, the position will be liquidated. To avoid this, traders can add margin to the trade and reduce the position (reducing leverage). This method is similar to maintaining a position when the odds approach 100% (if the trade continues to go in a losing direction).
Additional margin or credit reductionleverage can be compared to starting with a smaller leverage. The difference is that you can maintain a certain margin ratio for a longer time, and besides, this is a more effective solution.
How do I trade futures contracts on Binance?
Trading futures contracts on Binance is pretty straightforward. To gain access to the platform, you need to register on the official website of the exchange https://binance.com.
How to start trading crypto futures on the exchange:
- Open a futures trading account with Binance.Please note that you must enable 2FA to fund your futures account and trade on Binance Futures. You can find out more about opening an account here.
- Deposit funds in USDT, BUSD or other available cryptocurrencies on Binance Futures. Binance Futures supports a wide range of cryptocurrency assets as collateral.
- Select the desired futures contract.There are two types of Bitcoin futures contracts available on Binance: USDⓈ-M and COIN-M futures. So, if you want to trade BTCUSDT perpetual contracts, choose USDⓈ-M futures. For BTCUSD coin-margined contracts, choose COIN-M futures.
- Choose the appropriate leverage for your futures contract.
- Select one of the order types available on Binance Futures. Beginners can choose a limit order or a market order to buy their first futures contract.
A more in-depth guide to trading Bitcoin futures on Binance is available here.
Conclusion
Liquidation is a scary word.Traders try their best to avoid it. The good news is that there are several tools and trading strategies to avoid liquidation. With stop losses, liquidation calculators, leverage management, and margin ratio monitoring, traders have many resources to avoid liquidation.
Liquidation is only one part of the processtrade training. Want to know more? Binance offers everything a trader could need to trade responsibly. In addition to this article, you can learn best trading practices and learn more about trading terms and tools on Binance Academy. Also check out our detailed guide to trading on Binance Futures.
The official website of the Binance platform is https://binance.com.
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