Unpredictability is one of the peculiarities of the crypto market. The price of a cryptocurrency can rise or fall in response to demand, supply, and other price value triggers. Crypto trading refers to the act of taking a financial position in the direction of the market. A cryptocurrency can be traded against another using the various trade strategies available on the exchange market. To trade cryptocurrencies, you must have a good knowledge of the crypto market.
First step to gaining mastery of the crypto market is an understanding of fundamental and technical analysis. Fundamental analysis involves an overview of the available information on a crypto asset, it considers the asset’s team, user community and real life use cases. Technical analysis is a study of a crypto’s previous market movement’s and patterns, it focuses on the price trends and trade volume over time. A poor or wrong analysis of a cryptocurrency before trading could lead to a trader’s position being liquidated.
What is Liquidation?
The total or partial loss of funds that occurs when a trader cannot meet the margin requirement for their entry position is liquidation. When a trader’s account is liquidated, it is forced to close due to a lack of funds. If a trader takes a buy position at a specific market value and the trade then goes against them, it may retrace entirely or partially and reach the liquidation price, at which point the trader is liquidated and their positions are closed out.
Total and partial liquidation refers to situations in which there is a complete loss of funds or an incomplete loss. Partial liquidation occurs when a trader’s entry position closes early or halfway the leverage used. In contrast, total liquidation occurs when an entry closes nearly when all of the trader’s initial margin has been used. However, liquidation can be either forced or voluntary. Forced liquidation occurs when an exchange automatically closes a trader’s position, whereas voluntary liquidation occurs when the trader cashes out or closes their position on their own.
Five Ways to Protect Against Liquidation
Use a stop loss
Stop Loss is a cryptocurrency trading tool provided by exchanges to serve as an automatic call to close a trade at a specific price when the market is moving against you. It would help if you comprehended how much you are willing to lose in crypto trading. When this calculation is completed, the trader will know how much to throw in when trading. When a trader opens an entry position, they will set a stop loss to protect the trade from a significant loss or liquidation.
Monitor the margin ratio
Keeping an eye on the trade margin ratio helps to avoid liquidation risks. Monitoring a trade to ensure it doesn’t get to 100%; if the margin ratio hits 100%, the trader gets completely liquidated. The trader would have to keep adding to the margin to stay in the trade.
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Use lower leverage
Leverage is a borrowed fund used in trading to gain more profit. The profits from trade are proportional to the entry size. Higher leverage equals a higher yield, and when a loss is made, it equals a higher loss. It is good to make a higher profit, but it is detrimental in case of losses. Therefore, using lower leverage for a trade would lower liquidation risk.
Make risk management plans.
A good risk management plan is the best way to protect against liquidation. A risk management plan keeps a trader in check and helps them follow specific rules when the market goes in a particular direction. A plan and calculated approach will inform the trader of the best trade strategy.
Avoid emotional and greedy trading.
The cryptocurrency market is real and shouldn’t be traded with emotions. Before opening a position, ensure to have analyzed the trade using trade analysis tools, do not place a trade on sentiment and FOMO. Also, keeping an eye on an unrealistic profit could throw a trader into liquidation. Knowing your trade account size and placing a trade that follows a good account management plan would go a long way in protecting a trader from liquidation.
Final thoughts
Crypto trading can be rewarding but risky also. Knowing how to move around the market and ensuring proper account management will enable a trader to be successful. Success doesn’t mean a trader will not be liquidation at a point, but the losses are far lesser than the profits.
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