Understand the risks of liquidation in margins trading
The world of cryptocurrency trading has gained popularity in recent years, many people investing their money hard in this new border. However, with great potential has a great risk, and one of the most important risks is liquidation in margins trading.
What is margin trading?
Margin trading allows merchants to borrow part of their capital to buy more cryptocurrencies than they can afford it for themselves. This increases their potential yields, but also amplifies their losses if the market accumulates against them.
Liquidation in margins trading: a desperate measurement
When the position of a merchant is liquidated or exhausted at a loss, this means that the market believes that its position will not recover to its original value. In margins trading, this can happen when the price of the underlying assets drops considerably, forcing traders to cover their losses by selling the assets they borrowed.
The risks of liquidation in margins trading
Liquidation in margins trading can cause significant financial loss for two main reasons:
- Maximum call price: When the position of a merchant is liquidated, the market can set a “maximum call price”, which is the lowest price to which an investor can sell his assets . If the market reaches this price, the merchant must sell all his assets to cover his losses.
- Type of order 1 (OT1) Liquidation: The type 1 type liquidation is the most common liquidation type in margins trading. It is a question of selling a large part of the asset at a fixed price, which can cause significant losses for merchants.
How margin trading can lead to liquidation
Margian trading requires close surveillance and management of its positions. If traders did not properly manage their risk or neglect to monitor market conditions, they may be forced to quickly liquidate their positions, resulting in significant losses.
* Lack of risk management: The fact of not defining stop-loss commands, using the dimensioning of the position and diversifying transactions can lead to uncontrolled price movements.
* Insufficient position dimensioning
: Over-exchange or use a leverage without sufficient funds can cause significant losses when the market turns against you.
* Incorrect market analysis: The fact of not analyzing market trends and making informed negotiation decisions can lead to poor risk management.
Risks of mitigating liquidation
Although the liquidation is an inherent part of margins trading, there are measures that traders can take to minimize their risk:
- Use stop orders: Define stop-loss orders to limit potential losses if the market accumulates against you.
- Diversify the professions: Distribute your transactions over several assets and use different strategies to reduce global exposure to risks.
- Monitor market conditions: continuously monitor market conditions and adjust your trading strategy accordingly.
- Use the dimensioning of the position: Use position dimensioning techniques to control the risks and maximize potential yields.
Conclusion
Liquidation in margins trading can be a devastating event for merchants who did not properly manage their risk. However, by understanding the risks involved and taking measures to mitigate them, traders can minimize their losses and increase their chances of success.
Final reflections
Trading of cryptocurrencies is an intrinsically volatile market, and liquidation is only the many potential risks that traders must be ready to cope. By educating margins trading strategies and risk management techniques, traders can take control of their financial destiny and build a successful commercial career.