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Futures Trading Risks

2023.08.10 MEXC
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Compared to other types of investments, trading perpetual futures carries higher investment risks as prices may change rapidly in an unfavorable direction. Your losses could exceed your expectations, and you might need to make further payments to maintain your positions. Therefore, MEXC advises you to learn and understand the relevant risks.

1. Leverage


To engage in perpetual futures trading, MEXCers are required to deposit cryptocurrency assets worth a certain percentage of the total position value, known as position margin. If you buy a BTC/USDT perpetual futures contract worth 30,000 USDT, with an applicable margin ratio of 0.5%, you would only need to pay a position margin of 150 USDT. However, your exposure is the equal to 30,000 USDT of BTC. This means that any market movement would have a greater impact on your funds compared to buying the same value of spot assets.

2. Market Price Volatility


  • When the perpetual futures market experiences a one-sided rise or fall, accompanied by brief sharp declines or surgesthat quickly return to the original price, this phenomenon appears as small dashed lines on the K-line chart. This "wicking" phenomenon can trigger the liquidation price of many MEXCers, causing liquidation overnight without sufficient time for traders to add more margin. This phenomenon is known as "forced liquidation."

  • The occurrence of this phenomenon is often due to MEXCers underestimating one-sided market movements and not setting TP/SL (take-profit and stop-loss) when opening positions.

Although MEXCers may encounter forced liquidation when engaging in futures trading, when forced liquidation occurs, MEXC's foreced liquidation mechanism will execute tiered liquidation based on the risk limit tier of your position to avoid the liquidation of all your positions, thereby controlling risk.

2.1 Order Cancellation


In cross margin mode, all current open orders under the account will be cancelled, while in isolated margin mode, if the Auto Margin Addition feature is enabled, all current open orders for the futures pair will be canceled. After the order cancellation is completed, if the margin ratio is still greater than or equal to 100%, the next step will be executed.

2.2 Self-Trading of Long and Short Positions


In cross margin mode, positions in both long and short directions held by the same trader will undergo self-trading for position reduction (this step only happens in the cross margin mode forced liquidation process). After the execution of self trading of long and short positions is completed, if the margin ratio is still greater than or equal to 100%, the next step will be executed.

2.3 Tiered Liquidation


If your position is at the lowest risk limit tier, the process proceeds to the next step directly. If the risk limit tier of your position is higher than Tier 1, the tier must first be lowered. This involves the partial liquidation of the position currently at the risk limit tier, with the liquidation engine taking over at the bankruptcy price to lower the risk limit tier. After this, the maintenance margin ratio is recalculated based on the lowered risk limit tier, and if it remains greater than or equal to 100%, the forced liquidation conditions are evaluated. If the forced liquidation conditions are met, the process continues, progressively lowering the risk limit tier until it reaches the lowest tier.


2.4 Liquidation


If the position is at the lowest tier, but the margin ratio is greater than or equal to 100%, the remaining position will be taken over by the liquidation engine at the bankruptcy price.

3. Risk Limits


  • In a trading environment with significant price volatility, traders holding large positions using high leverage may face substantial risk of liquidation losses. If the insurance fund is depleted, the auto-deleveraging system may be triggered, introducing additional risk for other traders.

  • Therefore, MEXC implements a risk limit mechanism for all trading accounts. The system employs a tiered margin model for risk control, where the leverage multiplier is determined based on the size of the position. The larger the position, the lower the available leverage multiplier. You have the option to adjust the leverage multiplier, and the algorithm for the initial margin ratio is determined by the user's selected leverage multiplier.

3.1 Position Limit, Maximum Leverage, and Initial Margin Ratio


  • Before opening a position, you need to adjust the leverage multiplier yourself. If you do not adjust the leverage multiplier, MEXC defaults to a leverage multiplier of 20x, but you can customize it. The leverage multiplier determines the position limit, with a higher leverage multiplier resulting in a smaller maximum size of the position you can open.


  • When you adjust the leverage multiplier, the page will display a prompt indicating the maximum size of the position you can open.


3.2 Maintenance Margin Ratio


  • The maintenance margin directly affects the liquidation price. Therefore, MEXC strongly recommends that you close positions manually to avoid liquidation before your available margin drops to the maintenance margin level.

Please note that under abnormal price fluctuations and volatile market conditions, the system will take additional measures to maintain market stability, including but not limited to:

  • Adjustment of the maximum leverage allowed for the futures pair

  • Adjustment of the position limits for different tiers

  • Adjustment of the maintenance margin ratio for different tiers

4. Conclusion


Perpetual futures are a type of neutral financial tool. By using them correctly, MEXCers can earn reasonable returns, and they can become effective tools for investments in the cryptocurrency market.

Disclaimer: Trading crypto involves significant risk and can result in the loss of your invested capital. The materials are not related to the provision of advice regarding investment, tax, legal, financial, accounting, consulting, or any other related services and are not recommendations to buy, sell, or hold any asset. MEXC Learn solely provides information, but not financial advice. You should ensure that you fully understand the risk involved before investing.


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