Crypto Futures Basics: What Is Liquidation and How to Avoid It?
<h2 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 16pt; font-family: Arial; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"></span></h2><h2 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 16pt; font-family: Arial; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Key Takeaways:</span></h2><ul style="padding-inline-start: 48px;" class=" list-paddingleft-2"><li><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:0pt;"><span style="font-size: 12pt; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Leveraged positions are prone to volatile price swings, which may cause a trader’s equity to plunge into negative balance instantaneously and result in significant losses.</span></p></li><li><p style="line-height:1.7999999999999998;margin-top:0pt;margin-bottom:0pt;"><span style="font-size: 12pt; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Liquidation mechanisms help prevent traders’ accounts from falling into negative equity.</span></p></li><li><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Multiple strategies can be implemented to prevent liquidation, such as monitoring margin, using stop-losses or lowering the amount of leverage.</span></p></li></ul><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Crypto derivatives have gained a lot of popularity over the years, attracting traders from all over the world to Binance Futures. Given the high volatility in the cryptocurrency market, these financial instruments can help increase traders' profits within a short period through the use of leverage. However, it is important to remember that there are also considerable risks associated with leveraged trading. One of the main factors to succeed in futures trading is strategizing each trade carefully and understanding how much capital is at risk. </span></p><p><img src="https://public.bnbstatic.com/image/cms/blog/20220217/26b3d64b-ca6f-462f-acdd-41a58e45c8d7.png"/></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">In </span><a href="https://www.binance.com/en/futures" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">futures trading</span></a><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">, where leverage is easily accessible, knowing how much capital and leverage is vested into a trade will help you understand your total risk exposure, because in some cases, losing trades can lead to liquidation.</span></p><h2 style="line-height:1.38;margin-top:18pt;margin-bottom:6pt;"><span style="font-size: 16pt; font-family: Arial; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">What Is Liquidation in Crypto Futures Trades?</span></h2><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"></span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">The term liquidation is traditionally used to describe the conversion of assets into cash. But in futures trading, liquidation is something you want to avoid by all means. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Leveraged positions are prone to volatile price swings, which may cause a trader’s equity to plunge into negative balance instantaneously. In such cases, losses can be more significant than the maintenance margin, leading to liquidation. This process is involuntary and automatic if a trade has come to meet specific price criteria. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Liquidation can happen either slowly or quickly, depending on the amount of leverage used in a trade. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">For example, with lower amounts of leverage, liquidation won’t happen as soon as a minor correction occurs in the market. Nonetheless, higher amounts of leverage can deplete traders’ initial investment with little to no effort. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><a href="https://www.binance.com/en/futures" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"><img src="https://public.bnbstatic.com/image/cms/blog/20220217/d02ccaf4-da5b-4089-9362-ae53864d68dd.png"/></span></a></p><p><br/></p><h2 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 16pt; font-family: "IBM Plex Sans", sans-serif; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">When Would Liquidation Occur?</span></h2><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"></span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">A forced </span><a href="https://www.binance.com/en/support/faq/7ba80e1b406f40a0a140a84b3a10c387" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">liquidation</span></a><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"> process happens when a trader can no longer meet the margin requirements of their leveraged position.</span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Let’s say you were to open a long BTC/BUSD leveraged position with $100 as your account balance. You used 20x leverage to enter a trade worth $2,000. If the price of BTC were to drop by only 5%, your account balance would be wiped out as you can no longer fulfill the margin call demands to keep the trade afloat. This is what is called liquidation in futures trading.</span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><img src="https://public.bnbstatic.com/image/cms/blog/20220217/519c1f57-872d-49f7-9840-ef9faaf8b3ee.png"/></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"></span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Although this is a basic example, it is crucial to know your limits and how much you’re willing to lose on a trade to understand how much leverage you should use. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Binance Futures has introduced leverage limits on new accounts to protect users from the dangers and unintended consequences of using high leverage. It is imperative to fully understand the impact of leverage and the circumstances under which it can significantly damage the probability of a profitable trade. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Read more about </span><a href="https://www.binance.com/en/support/faq/25edcd7fe0e544839d0847b8cbb2e400" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">how to reduce your chances of liquidation</span></a><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">.</span><br/></p><h2 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 16pt; font-family: "IBM Plex Sans", sans-serif; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Quick Tips to Prevent Liquidation</span></h2><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"></span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">To remain on the safe side, traders must have a plan in place with planned exits before entering any trade. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">There are multiple strategies that can be implemented to avoid risks, but you should consider the following to avoid liquidation. </span></p><h3 style="line-height:1.38;margin-top:16pt;margin-bottom:4pt;"><span style="font-size: 14pt; font-family: Arial; color: #434343; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">1. Use Stop-Loss Orders </span></h3><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">The most obvious answer to avoid liquidation is simply using a stop loss. A stop loss is a trading tool Binance Futures offers, which allows traders to set a price to automatically exit a trade should the price of an asset hit this predetermined level. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Using a stop loss in conjunction with a </span><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">l</span><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">iquidation calculator, can help protect a trader’s account from incurring significant losses, and especially from liquidation.</span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Although you may still lose some funds, the stop loss tool will protect you from losing everything on a trade and from having to pay liquidation fees. Besides, who wants to lose and get penalized for it? By using a stop-loss, you can prevent this from happening. </span></p><h3 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 14pt; font-family: "IBM Plex Sans", sans-serif; color: #434343; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">2. </span><span style="font-size: 14pt; font-family: Arial; color: #434343; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Decrease the Amount of Leverage</span></h3><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Leverage has a significant impact on the longevity of a trade. While it may be enticing to use large amounts of leverage, it could also magnify your losses.</span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">As shown in the example above, the high amount of leverage can hurt a trader even when a small price change occurs. Thus, using lower leverage will help you navigate a volatile crypto market smoothly and safely. </span></p><h3 style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 14pt; font-family: Arial; color: #434343; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">3. Monitor the Margin Ratio</span></h3><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Another option that traders can implement is monitoring the </span><a href="https://www.binance.com/en/support/faq/360033162192" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">margin ratio</span></a><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">. When the margin ratio hits 100%, the position will be liquidated. To avoid this outcome, traders can add more margin to their trade to return leverage and reduce their position). This method is akin to keeping a position alive when the trade is heading further in the wrong direction. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Adding more margin or reducing leverage is similar to starting with less leverage in the first place. The difference is that maintaining a specific margin ratio can be done over more extended periods and is a dynamic solution.</span></p><p><img src="https://public.bnbstatic.com/image/cms/blog/20220217/34515a68-7d02-4612-ad4e-7ab3835e1c0d.png"/></p><h2 style="line-height:1.38;margin-top:18pt;margin-bottom:6pt;"><span style="font-size: 16pt; font-family: Arial; font-weight: 400; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">In Summary</span></h2><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Liquidation is a scary word that traders would much prefer to avoid if possible. The good news is that traders have several tools and trading strategies that they can implement to avoid being liquidated. From stop losses to monitoring the margin ratio, traders have multiple resources to avoid liquidation. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">If you think you might want to learn more about trading, Binance Futures offers everything a trader may need to trade responsibly, like the </span><a href="https://academy.binance.com/en/articles/the-ultimate-guide-to-trading-on-binance-futures" target="_blank"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">Ultimate Guide to Trading on Binance Futures</span></a><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">. Additionally, the platform offers incredibly competitive rates, fees, and multiple financial instruments for traders. </span></p><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><span style="font-size: 12pt; font-family: "IBM Plex Sans", sans-serif; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">Read the following support items for more information about trading futures:</span></p><ul style="padding-inline-start: 48px;" class=" list-paddingleft-2"><li><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><a href="https://www.binance.com/en/support/faq/360040016512" target="_blank"><span style="font-size: 12pt; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">(Support) How to Place Stop Loss Order and Take Profit Order</span></a></p></li><li><p style="line-height:1.7999999999999998;margin-top:8pt;margin-bottom:8pt;"><a href="https://www.binance.com/en/blog/futures/how-binance-takes-responsible-trading-seriously-and-you-should-too-421499824684900595" target="_blank"><span style="font-size: 12pt; color: #1155CC; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">(Blog) How Binance Takes Responsible Trading Seriously, and You Should Too</span></a></p></li><li><p style="line-height:1.7999999999999998;background-color:#ffffff;margin-top:0pt;margin-bottom:0pt;padding:0pt 0pt 8pt 0pt;"><a href="https://www.binance.com/en/support/faq/360033525271" target="_blank"><span style="font-size: 12pt; color: #1155CC; background-color: transparent; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;">(Support) Liquidation Protocol</span></a></p></li><li><p style="line-height:1.7999999999999998;background-color:#ffffff;margin-top:0pt;margin-bottom:8pt;"><span style="font-size: 12pt; background-color: transparent; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;">And many more</span><a href="https://www.binance.com/en/support/faq/c-4?navId=18#/4/18" target="_blank"><span style="font-size: 12pt; color: #1155CC; background-color: transparent; font-variant-numeric: normal; font-variant-east-asian: normal; text-decoration-line: underline; text-decoration-skip-ink: none; vertical-align: baseline; white-space: pre-wrap;"> Binance Futures FAQ</span></a><span style="font-size: 12pt; background-color: transparent; font-variant-numeric: normal; font-variant-east-asian: normal; vertical-align: baseline; white-space: pre-wrap;"> topics...</span></p></li></ul><p><br/></p><p><a href="https://www.binance.com/en/futures" target="_blank"><img src="https://public.bnbstatic.com/image/cms/blog/20220217/bed23269-840f-42bf-a51f-0e60b500a45b.png"/></a></p>
2021-08-02