In cryptocurrency market we can do your transactions in three main ways: Spot trading, margin trading and futures trading. Liquidation is specific to margin and futures transactions. In this article, we introduce you to the concept of liquidation in simple language, which is one of the most important topics in cryptocurrency transactions. We have also explained you some practical ways to prevent this from happening.
What does liquidation mean?
Suppose your analysis shows that a certain currency is going to increase in price and you open a long position on it with leverage in the futures market. If the market trend goes against the direction of your analysis and you have not set a loss limit for your transaction and your loss exceeds your input capital, you will lose all your input capital (margin) for this transaction and idiomatically you become liquid.
One of the attractive features of the futures and margin markets is the possibility of using leverage. Leverages will multiply your profit and loss, for example 5x leverage will multiply your profit and loss 5 times. We consider that you have opened a long position with a leverage of 10 on Ethereum with the amount of 1000 dollars of input capital. In this case, if Ethereum faces a 3% price increase, you have gained 30% of your input capital equal to 300 dollars, and on the contrary, if your analysis is wrong and Ethereum faces a 3% price decrease, your position will be in a 30% loss equal to 300. dollars will be placed. The important point is that this loss will continue until the amount of loss is less than the amount of initial capital. That is, in the above example, if Ethereum has a 10% price drop, this position will be automatically closed and you will completely lose your $1000 entry and become liquid.
Of course, when your position is at a loss of 80% of the input capital, the exchange will automatically send you an email and announce the margin call to inform you that if you need to add some amount to your input capital, the transaction will not be closed. In reality, you are liquid when you no longer have capital to add to your margin (input capital to the position).
Recommendations to prevent liquidation
In the first step, if you do not have the knowledge of technical or fundamental analysis and any other analysis about digital currencies, or if you have just started learning these things, we suggest you to use spot transactions in which you will not be liquid at all.
Second, you should first increase your knowledge and skills in the field of analyzing the price trends of cryptocurrencies and then do paper trading for a few months with the market and its fluctuations. You can do paper trading without any limit o virtual fund or amount of transaction on Dealerify.
Now, if you have considered all the above and intend to enter futures trading, it is recommended that you use low leverages so that the risk of your trading is lower.
Do not enter into a transaction with your entire capital and set a reasonable and correct loss limit for each transaction so that if your loss in a position reaches a certain amount, the position will be closed automatically and you will not lose more than this.
One of the ways to avoid liquidation at the time of loss is to gradually increase the amount of capital involved in the position. You must have enough capital to increase it again before the loss of the opened position exceeds the amount of capital entered into the position so that the position remains active.
Finally, if you are using the Dealerify platform for your trade, rest assured because we will calculate and display the liquidation line on the chart for each of your orders based on the entry point and leverage you set, and you will not be able to place a stop loss below this range, this will help you avoid liquidation automatically.