In the field of cryptocurrency, which is full of excitement and challenges, contract trading attracts countless investors with its high leverage and high returns. However, high returns are often accompanied by high risks, and contract liquidation has become a nightmare for many investors. Today, we will provide you with practical tips to avoid contract liquidation, to help you move forward steadily in the cryptocurrency circle.
1. Understanding contract liquidation
Before understanding how to avoid a margin call, we must first understand what a margin call is. A margin call is a financial derivative where investors predict the price trend of digital currencies, choose to go long or short, and use leverage to amplify their earnings. But leverage is a double-edged sword. When the market trend is contrary to investors' expectations and the loss reaches a certain level, in order to avoid further losses, the platform will force a liquidation, which is a margin call.
For example, if you buy a Bitcoin contract with 10x leverage and the Bitcoin price drops by 10%, theoretically, your principal would be completely lost, triggering liquidation. Understanding the liquidation mechanism is the first step in preventing liquidation.
Two, Use Leverage Reasonably
Leverage is the core of contract trading and one of the main reasons for liquidation. Many investors blindly use high leverage in pursuit of high profits while neglecting the risks.
It is recommended that beginners start with low leverage, such as 2-5x leverage. Although low leverage yields relatively lower returns, it is also controllable in terms of risk. As experience accumulates, adjust the leverage appropriately based on market conditions and personal risk tolerance. Additionally, plan the leverage amount used for each trade reasonably based on your capital and trading plan to avoid bearing excessive risk due to high leverage.
Three, Set Reasonable Stop-Losses
Stop-loss is a key defensive line to avoid liquidation. In contract trading, the market changes rapidly, and no one can guarantee that every prediction is accurate. Setting a stop-loss means that when a trade incurs a loss, it will automatically close at a predetermined price, limiting further losses.
The setting of stop-loss levels should be determined based on market volatility and individual risk tolerance. Generally, you can refer to support and resistance levels to set stop-losses. For example, when going long, set the stop-loss below the recent support level; when going short, set it above the resistance level. At the same time, strictly adhere to the stop-loss plan and do not arbitrarily change the stop-loss level due to wishful thinking.
Four, Control Positions
Position control is an important means of managing risk. Do not invest all your funds into a single contract trade; it is advisable to divide your total funds into several parts, using only a small portion for each trade. For example, divide the funds into 10 parts and use only 1-2 parts for each trade, so that even if a trade results in liquidation, it will not have a devastating impact on the overall funds.
At the same time, adjust your position according to market conditions. When the market trend is unclear or highly volatile, reduce your position; when the market trend is clear and favorable to your judgment, appropriately increase your position, but also be mindful to control it within a reasonable range.
Five, Pay Attention to Market Dynamics
The cryptocurrency market is influenced by various factors, such as macroeconomic conditions, policies, technological developments, and market sentiment. Closely monitoring the changes in these factors can help us better grasp market trends and prepare countermeasures in advance.
Pay attention to monetary policy adjustments by central banks around the world, as the easing or tightening of monetary policy can affect the liquidity of market funds and subsequently affect cryptocurrency prices. At the same time, pay attention to regulatory policies regarding cryptocurrencies in different countries, as changes in policies may lead to significant market fluctuations. Additionally, stay informed about major events in the industry, such as Bitcoin halving and new cryptocurrency projects launching, as these events can have a substantial impact on the market.
Six, Learn Technical Analysis
Technical analysis is a method of predicting future price trends by studying historical price and volume data. Mastering basic technical analysis tools and indicators can help us more accurately judge market trends and improve the success rate of trades.
For example, moving averages can help us determine the short-term, medium-term, and long-term trends of the market; the MACD indicator can be used to judge market buy and sell signals. By learning and using these technical analysis tools, we can better grasp entry and exit timing and reduce the risk of liquidation.
Seven, Maintain a Good Mindset
In contract trading, mindset plays a crucial role. Greed and fear are the biggest enemies of investors. When in profit, do not be overly greedy and blindly pursue higher returns while ignoring risks; when in loss, do not panic and make wrong decisions.
Maintain a calm mindset, viewing contract trading as a long-term game rather than short-term gambling. During the trading process, strictly adhere to your trading plan and discipline, without being swayed by emotions.
Eight, Simulated Trading Practice
For novice investors, conducting simulated trading before officially entering the contract trading market is a great way to learn and practice. Through simulated trading, you can familiarize yourself with the trading process, master trading skills, and also test whether your trading strategy is feasible.
In the simulated trading process, take every trade seriously and record the issues and lessons learned during the trading process. After a period of simulated trading training, when you can stabilize profitability, consider entering the real trading market.
Contract trading in the cryptocurrency market is full of opportunities, but it also comes with significant risks. By reasonably using leverage, setting stop-losses, controlling positions, paying attention to market dynamics, learning technical analysis, maintaining a good mindset, and conducting simulated trading, we can effectively reduce the risk of liquidation and increase the success rate of investments in the cryptocurrency market. I hope everyone can reap rewards and achieve wealth appreciation in the cryptocurrency market.
Lastly, I would like to remind you again that investment in the cryptocurrency market carries extremely high risks, and the content of this article is for reference only and does not constitute investment advice. Before making any investment decisions, please ensure that you fully understand the relevant risks and make decisions cautiously based on your own circumstances.