Contract Explosion Prevention Guide

● Risk Control. Contract trading is a high-risk investment activity. Before engaging in contract trading, you need to formulate a detailed risk control plan.

. Capital Management. Reasonable capital management/allocation can effectively reduce risks and avoid contract liquidation.

● Control Leverage Ratio. Controlling the leverage ratio is one of the important methods to avoid contract liquidation.

Timely Stop Loss. Stopping loss is more difficult than taking profit.

What is Contract Liquidation?

It refers to the situation in contract trading where, due to rapid or significant changes in market prices, the margin in the user's account is insufficient to maintain the existing contract position, resulting in forced liquidation and loss settlement. The principle of contract liquidation can be represented by the following formula: Margin Rate = (Account Equity + Unrealized Profit and Loss) / (Contract Value * Leverage Multiple). When the margin rate falls below the maintenance margin rate, a forced liquidation mechanism will be triggered, meaning the platform will automatically liquidate all of the user's contract positions at the best market price and deduct the corresponding handling fees and funding rates. If the market price fluctuates too much, causing the liquidation price to fall below the bankruptcy price (i.e., the price when account equity is zero), liquidation losses will occur, meaning the user will not only lose all their margin but may also need to compensate the platform or other users for their losses.

Why is Liquidation Easy to Occur?

The fundamental reason for contract liquidation is that changes in market prices exceed the user's expectations and tolerance, leading to insufficient margin to support the contract position. Due to the leverage effect, the risks of contract trading are very high. When the price is unfavorable to you, you need to close your position in a timely manner to prevent further losses. If you do not close your position in time, your margin will gradually decrease until it ultimately reaches the liquidation line. If your margin falls below the liquidation line, your position will be forcibly liquidated, and all funds will be cleared.

So how to avoid being trapped.

The most important thing is setting the leverage, and also not over-leveraging, and strictly implementing stop loss and take profit.

Investing without understanding risk control, no matter how much capital you have, will lead to a total loss.