How to Prevent Liquidation in Futures Trading
#Basic
#Beginners
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1. What is Liquidation?
In futures trading, when significant market fluctuations cause the margin in your futures account to fall below the required margin level, your position must be forcibly closed. This event is known as forced liquidation, commonly referred to as "liquidation."
To learn more about liquidation, please refer to the article "What is Forced Liquidation" for further information.
2. Why Does Liquidation Occur?
The main reason for liquidation is that market price fluctuations exceed the trader's expectations, causing their positions to be unable to maintain the required margin level. Common reasons for liquidation include the following:
2.1 High Leverage or Expanding Positions
Futures trading is characterized by high returns and high risks. When traders pursue profits by using excessive leverage or large positions, their margin ratio becomes too low. This reduces their ability to withstand market price fluctuations, thereby increasing the risk of liquidation.
2.2 Not Setting Stop-Loss Orders
Many traders prefer to monitor the market themselves and choose whether to close positions based on market changes, rather than setting SL orders. Some traders are simply not in the habit of setting SL orders. These practices can easily lead to liquidation when there are significant market fluctuations.
2.3 Flawed Strategy
Market trends are often unpredictable, and no one can accurately forecast future price movements. Some traders, influenced by short-term market trends, might believe these trends will continue and thus increase their positions, or they might anticipate a reversal. These strategies, based on personal beliefs, can exacerbate initial losses and ultimately lead to liquidation.
3. How to Avoid Liquidation
Before engaging in futures trading, it is crucial to set realistic investment expectations and implement risk management strategies due to the high volatility of futures trading. This way, even if there are significant market fluctuations, your losses will remain manageable.
If you are new to futures trading, you can start by practicing with futures demo trading or using copy trading strategies. This will help you gradually learn trading techniques before engaging in real trading.
3.1 Control Leverage
There are no fixed leverage ratios, they depend on your account funds and risk preference. For novice traders, it is not advisable to set too high a leverage ratio, reducing leverage can effectively reduce the risk of liquidation.
3.2 Setting Stop-Loss
When conducting futures trading, you need to set SL points when opening positions or for trades that are already open. This way, in case of fluctuations, your losses can be reduced to a tolerable level, effectively preventing liquidation.
3.3 Proper Capital Allocation
Learn to allocate capital reasonably, ensuring that no single asset in your investment portfolio exceeds a certain percentage of the overall funds. This way, diversifying capital allocation can effectively reduce risks.
Disclaimer: This information does not provide advice on investment, taxation, legal, financial, accounting, consultation, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. MEXC Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.