Understanding the risk of liquidation in margin trade
The world of cryptocurrency trading has gained enormous popularity in recent years, and many people invest their hard -earned money in this new limit. However, there is a great risk with great potential, and one of the most important threats is the liquidation of margin trade.
** What is a margin trade?
Margin trade allows traders to borrow part of the capital to buy more cryptocurrencies than they can afford. This increases their potential returns, but also strengthens their losses if the market is moving against them.
Liquidation in margin trade: desperate measure
When the position of a salesman is liquidated or sold out with a loss, it means that the market believes that their position will not regain its original value. In margin trade, this can happen when the price of basic assets drops significantly, forcing traders to cover their losses by selling the assets they borrowed.
Risk of liquidation in margin trade
Liquidation in the margin trade can cause significant financial losses for two main reasons:
- The maximum price of the call : When the trader’s position is liquidated, the market may determine the “maximum connection price”, which is the lowest price at which the investor can sell his assets. If the market reaches this price, the trader must sell all its assets to cover its losses.
- Order type 1 (OT1) Liquidation : type 1 liquidation is the most common type of liquidation in margin trade. It includes the sale of a large part of assets at a fixed price, which can cause significant losses for traders.
How can a margin trade lead to liquidation
Margin trade requires strict monitoring and managing your own positions. If traders do not manage the right risk or neglect monitoring of market conditions, they may be forced to quickly eliminate their positions, which causes significant losses.
* Lack of risk management
: Lack of STOP-LOSS order setting, using the size of positions and transaction diversification can lead to uncontrolled price movements.
Important position size : Excessive sleeves or the use of lever sufficient funds can cause large losses when the market turns against you.
* Incorrect market analysis : lack of analysis of market trends and making conscious commercial decisions can lead to poor risk management.
Risk of alleviating liquidation
Although liquidation is an integral part of the margin trade, there are steps that traders can take to minimize their risk:
1.
- Diversix Prases : Spread your transactions into many resources and use various strategies to reduce general risk exposure.
- Monitor market conditions : Still monitor market conditions and adjust the trade strategy accordingly.
- Use the position size : Use a position size techniques to control the risk and maximize potential returns.
Application
Liquidation of margin trade can be a destructive event for traders who do not manage the right risk. However, by understanding the risk and taking steps to alleviate them, traders can minimize their losses and increase their chances of success.
Final thoughts
Cryptocurrency trading is by nature an unstable market, and liquidation is only one of many potential threats for which traders must be prepared. By educating on the trade strategies of risk management margins and techniques, traders can take control of their financial purpose and build a successful trade career.