Beginner's Guide — How to Avoid Liquidation

To avoid contract liquidation, investors should have the following abilities: Strong risk control skills. Contracts are high-risk investments, so before entering into a contract, you need to develop a detailed risk control plan; Reasonable capital management skills. Proper capital management/allocation can effectively reduce risk and prevent contract liquidation; Control leverage ratio. Controlling leverage ratio is one of the important ways to avoid contract liquidation; Timely stop loss. Stop loss is more difficult than taking profit.

 

Contract liquidation refers to the situation in contract trading where, due to rapid or large market price changes, the user's margin in the account is insufficient to maintain the original contract position, resulting in forced liquidation and loss settlement. The principle of contract liquidation can be expressed by the following formula: Margin Ratio = (Account Equity + Unrealized P&L) / (Contract Value * Leverage) When the margin ratio falls below the maintenance margin ratio, the forced liquidation mechanism is triggered, meaning the platform will automatically close all of the user's contract positions at the best market price. If the market price fluctuates too much, causing the liquidation price to fall below the bankruptcy price (the price at which account equity is zero), liquidation loss occurs, meaning the user will not only lose all the margin but may also need to compensate the platform or other users for losses.

 

The fundamental cause of contract liquidation is market price changes exceeding the user's expectations and tolerance.

 

Due to the leverage effect, contract trading carries very high risk. When prices move unfavorably for investors, they need to close positions promptly to prevent further losses. Without timely closing, the margin gradually decreases until it reaches the liquidation line. If the investor's margin falls below the liquidation line, the contract will be forcibly liquidated, and all funds will be settled.

 

Overly heavy positions: Some users, seeking higher returns, choose higher leverage or larger position sizes, resulting in a low margin ratio and large risk exposure. Once the market moves against them, it is easy to trigger the liquidation line.

No stop loss set: Some users, to avoid frequent stop losses or missing rebound opportunities, choose not to set stop losses or set very loose stop loss conditions, making it impossible to control losses promptly. Once the market experiences sharp volatility, liquidation is very likely.

Refusing to admit mistakes: Some users, facing adverse market movements, deny or comfort themselves psychologically, unwilling to admit their judgment errors, and continue to hold or increase positions, resulting in expanding losses. Once the market experiences extreme volatility, liquidation is very likely.

 

Control leverage. The liquidation point depends on leverage and margin levels.

Example: Suppose an investor uses $10,000 with 5x leverage to buy $50,000 worth of Bitcoin, equivalent to a 20% margin. If the next day Bitcoin rises 20%, the position value becomes $60,000, with a profit of $10,000. Since the investor’s principal is only $10,000, this represents a 100% return. Conversely, if Bitcoin falls 20% the next day, the loss is $10,000, wiping out the entire principal. If losses continue, the platform will forcibly sell the investor’s Bitcoin, which is forced liquidation, i.e., complete liquidation.

In practice, for new users participating in contract trading for the first time, when opening a position, they should choose appropriate leverage and position size based on their capital and risk tolerance, avoiding excessive greed or fear. Generally, the margin ratio should be kept above 10%, and leverage should be kept below 10x.

 

Set stop loss. Controlling reasonable leverage can reduce liquidation risk to some extent, but the crypto market is highly volatile. Even with controlled leverage, large market swings can still impact positions. Therefore, under the premise of reasonable position control, investors also need to set stop loss points/lines. Stop loss can be seen as part of the exit strategy for each trade. Once the price reaches the predetermined level, these orders are executed, closing the investor’s long or short position to reduce losses.

nodexx strongly recommends setting a stop loss/exit point for every contract trade because no one knows what will happen in the cryptocurrency market on any given day. Therefore, stop loss helps protect you from unknown circumstances and better understand the expected outcome of each position you open. Setting stop loss on nodexx is very simple.

Suppose you buy Bitcoin at $10,000 on nodexx. To minimize potential losses on this trade, the investor can set a stop loss order at 20% below the purchase price (i.e., $8,000). If the BTCUSDT price falls below $8,000, your stop loss order will be triggered. Then, the exchange sells the contract at the current market price, which may be exactly the $8,000 trigger price or significantly lower, depending on the current market conditions.

It’s important to note that stop loss is not a foolproof method to prevent forced liquidation. In the crypto market, the liquidation price may change. Setting stop loss only reduces the risk of liquidation but cannot avoid forced liquidation entirely. For new users, this may be the only “unfriendly” aspect. Therefore, before starting contract trading, investors must clearly and firmly define the maximum loss they can accept. The most straightforward approach is “Order size = maximum stop loss amount,” meaning after evaluating the maximum loss per trade, the user bases the order size on that number.

 

Capital management. It is well-known that capital management is a method to reduce risk while maximizing trading account growth potential. This strategy limits the capital used for any single trade to a certain percentage of the account value. For beginners, 5%-10% is a relatively reasonable range. The dollar value in this range will rise or fall with the account value and ensures you do not overexpose your entire account.

Due to the unpredictability and volatility of cryptocurrencies, when investing in high-leverage derivatives such as perpetual futures contracts, you could lose your entire investment principal within minutes. Therefore, investors should adhere to stricter limits; the rule of thumb when trading volatile assets is to risk only 5% or no more than 10% of capital in a specific trade.

For example, suppose an investor has 10,000 USDT in a nodexx contract account. In this case, the investor would allocate 500-1,000 USDT risk per trade. If a trade goes wrong, the investor only loses 5% or 10% of the account funds. Good risk management means having the right position size, knowing how to set and move stop losses, and considering the risk/reward ratio. A sound capital management plan allows investors to build a portfolio that won’t cause sleepless nights.

It should be noted that although capital management reduces investor risk, overtrading must be avoided. Overtrading occurs when investors have too many open orders or risk disproportionate amounts of capital in a single trade, exposing the entire portfolio to excessive risk. To avoid overtrading, one must follow the trading plan and maintain discipline with pre-planned strategies.

 

Most trading beginners are notorious for overtrading, often caused by failure to control emotions like greed, fear, and excitement. Although traders can earn huge profits by opening many orders, losses can be equally devastating. A cautious approach to limit losses on all orders is to set a maximum capital amount an investor is willing to risk at any time.

For example, if an investor holds 25 contract trades simultaneously, even if the risk per contract is 1%, all 25 trades could go against the investor simultaneously (almost anything can happen in the crypto market), resulting in a 25% major loss to the portfolio.

Besides the risk per trade, investors should also consider the cumulative risk across the entire portfolio, also called total risk capital. As a general rule, an investor’s total risk capital should be less than 10% of the portfolio, meaning if the risk per trade is 1% of the portfolio, the maximum number of open contracts should be 10.

 

In contract trading, the risk of liquidation is a challenge every investor faces. Therefore, investors should learn how to avoid liquidation. The reasonable setting of leverage, stop loss points, and capital management to reduce risk introduced in this article are effective risk control measures that can help investors achieve more stable returns in contract trading. At the same time, before engaging in contract trading, investors are advised to understand nodexx platform rules, market trends, and related information to make accurate market predictions.