#What is liquidation? What to do if your position is liquidated? Lao Jiucai teaches you how to avoid liquidation and keep your principal!

Veterans of contract trading, do you feel nervous when you hear the word "liquidation"? This thing is like a ghost story in the currency circle. No one wants to encounter it, but someone always stumbles. As soon as the market takes a hit, the account goes directly to zero, and even owes the platform money - I have seen this kind of thing too many times. Today, let’s talk about what liquidation is, why it happens, what to do if it happens, and most importantly, how to avoid this pit.

What exactly is liquidation?

Liquidation is called liquidation in English. To put it bluntly, in leveraged trading, if your margin is not enough to withstand market fluctuations, the platform will force you to close your position without saying a word. The result? At worst, the account will be reset to zero, but at worst, money will have to be transferred. This is no joke, especially for those who play futures and contracts. Once the leverage is turned on, the returns can be magnified and the risks can also skyrocket. If the market trembles a little, your principal may be gone.

Why is the position liquidated? Old Leek’s Lessons of Blood and Tears

The issue of liquidation is mostly due to poor risk management. I have summarized a few common reasons. See if you have been shot:

The leverage is too high: I want to become fat in one bite, but the market slaps me back and the margin evaporates instantly. High leverage is a double-edged sword, and if you don't use it properly, you'll end up hurting yourself.
Don’t stop losing: Hold on until the end, thinking you can make it back, but as a result, the losses get bigger and bigger, and the position is immediately liquidated. This is called "If you don't cut off your flesh, you will cut off your life."
Operation against the trend: The market is obviously falling, so you have to buy the bottom; when the market is rising, you have to hit the top. This is not bravery, but stubbornness.
Excessive trading: Do dozens of operations a day, pay no less handling fees, the positions are in a mess, and the funds cannot withstand fluctuations.
Ignore market risks: When a black swan event occurs, such as policy changes or market crashes, your position will be gone before you can react.
Poor position management: Full position stud, one decision determines life or death. Once the market reverses, there is no chance to cover positions.
Emotional Trading: It’s over! Greedy wants to make more, fear is afraid of missing out, and as a result, the operation is deformed and the position is liquidated without negotiation.

How to avoid liquidation? Here comes the practical stuff

If you don’t want to blow up your position, you must have risk control engraved in your bones. The following tips are what I have learned from many years of pitfalls, and they are effective in my own testing:

1. Don’t open the leverage too high

Remember what Mr. Buffett said: "Leverage and ignorance are a fatal combination." Beginners especially need to be steady. It is enough to control the leverage at 2-3 times. Don't imitate those experienced players who play dozens of times. Your principal is not blown by the strong wind, so you have to use it sparingly.

2. Stop loss must be set

Every trade must have a stop loss, it is your life-saving talisman. As soon as the price reaches the stop loss point, the position is automatically closed, and the loss is within controllable range. Don't feel bad about that small loss, it's better than being liquidated.

3. Diversify your investments, don’t put all your eggs in one basket

Mainstream coins, altcoins, and DeFi projects all have a little bit of them. If the east is not bright, the west is bright. When the market fluctuates, it won’t be all over the place.

4. Control position size

A heavy position is a taboo! A single transaction should not exceed 10% of the total capital. Leave some surplus so that you can survive when the market takes action.

5. Keep an eye on market risks

When major news is released or the market fluctuates violently, reduce your position first and wait and see. Don't be stubborn, preserving your principal is the way to go.

6. Stay rational and don’t let your emotions control you.

It is normal for the market to rise and fall. Don't be greedy to increase your positions when it rises, and be afraid to cut your positions when it falls. Make a good trading plan, strictly implement it, and operate like a robot.

What to do if the position is liquidated?

Don’t panic if your position is liquidated. This thing is like a cold in the currency circle, and anyone can get caught. The key is how to respond and learn from it.

1. Let’s first see how big the loss is

Quickly check your account to confirm how much you have lost and whether there is a negative balance (some platforms have protection, so you don’t need to make up the money). Assess your remaining funds and don’t affect your life. If you lose this time, you should treat it like paying tuition and making it easier to remember.

2. Review to find out the reason

Calm down and think about what went wrong: Too much leverage? No stop loss? Or are you emotionally overwhelmed? Find the root cause and avoid it next time.

3. Pause trading and learn to adjust strategies

Stop immediately after liquidating your position, and don’t be in a hurry to make money. Go learn risk management knowledge and reflect on your own trading mentality. Based on this lesson, re-formulate the plan - reduce leverage, strictly stop losses, and optimize positions. It's not scary to be liquidated. What's scary is falling into the same pit twice.

Conclusion

Liquidation is an unavoidable risk in leveraged trading, but as long as you do a good job of risk control, you can greatly reduce the probability. Remember, the first priority in investing is to protect the principal, and you will have the opportunity to make money while you are alive.

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