What is Liquidation?
In futures trading, liquidation occurs when a user’s account margin is insufficient to maintain a position, reaching a risk threshold where the system automatically handles the risk position to prevent further losses.
In simple terms, liquidation is a forced closing of positions by the system to prevent the account from going into a negative balance.
What Causes Liquidation?
- High leverage: High leverage not only amplifies gains but also increases risks. Even small market fluctuations can lead to insufficient account margin, thus triggering liquidation.
- Market volatility: The cryptocurrency market is highly volatile, and prices can rise or fall sharply in a short period. If the market moves against the position, the risk of liquidation will significantly increase.
- Failure to add margin in time: When market fluctuations result in insufficient margin, if additional margin is not added promptly, the system will forcefully close positions to prevent further losses.
How to Avoid Liquidation?
To reduce the risk of liquidation, Gate users can adopt the following strategies:
- Choose reasonable leverage
The higher the leverage, the greater the risk. Beginners are advised to start with lower leverage so that even in the case of large market fluctuations, they have more time to adjust their positions or add margin. - Closely monitor the mark price
Gate uses the mark price to calculate profit and loss (PnL) and margin ratio. The mark price is derived from the spot index price and premium index, representing the fair price in the futures market. Keeping a close eye on changes in the mark price helps in determining when to adjust positions or add margin. - Set take-profit and stop-loss (TP/SL) conditions
Presetting TP/SL conditions allows transactions for automatic execution during sudden market fluctuations, preventing excessive losses or locking in profits. This feature is particularly useful for users who can’t constantly monitor the market. - Manage positions wisely
Avoid putting all funds into a single contract. Diversifying positions can reduce the impact of a single market fluctuation on the account, thereby lowering the risk of liquidation. - Add margin in a timely manner
Gate offers an alert system for liquidation warnings, allowing users to receive notifications when nearing liquidation risk. This helps users adjust strategies or add margin in time to effectively prevent liquidation.
Conclusion
The risk of liquidation is an inherent part of futures trading and cannot be completely avoided. However, through prudent risk management and strategic planning, this risk can be significantly reduced. Both beginners and experienced traders should remain cautious and ensure that their trading strategies align with their risk tolerance.
Gate reserves the final right to interpret the product.
For further assistance, please visit the Gate official support page or contact our customer support team.
