In cryptocurrency market contract trading, the high leverage characteristic acts like a double-edged sword, amplifying profits but also potentially rapidly increasing losses. For inexperienced traders, the most common dilemma is facing floating losses after holding positions. When floating losses occur, especially when losses evolve from 'a little bit' to 'significant,' traders often find themselves in a dilemma: should they hold on, expecting a market rebound that will eventually lead to liquidation, or decisively stop-loss to avoid greater losses? This article will delve into this issue in depth, hoping to help you make smarter decisions in the face of floating losses.
Understanding the Nature of Floating Losses
First, we need to clarify what floating loss is. In contract trading, floating loss refers to the decrease in account equity due to market prices moving unfavorably after holding a position. However, as long as the position is not closed, this loss is only 'floating' and has not actually occurred. The amount of floating loss can change with market price fluctuations, potentially increasing or even turning from negative to positive.
Initial Floating Loss: 'A Little Bit' of Loss
When a trade initially shows slight floating losses, many traders often hold a sense of luck, believing it is just a temporary market fluctuation and prices will soon rebound. This mindset is understandable, as no one wants to face losses right after opening a position. At this point, some common coping strategies may include:
Ignore Floating Losses and Continue Holding: Believing that the market will return to their judgment direction, choosing to ignore slight floating losses and continue to hold positions. The potential risk of this strategy is that if the market continues to move unfavorably, slight losses may quickly expand.
Slightly Average Down to Reduce Cost: Some traders may attempt to slightly average down at a loss position to reduce their holding costs, hoping that a small price rebound will turn losses into profits. However, if the judgment is incorrect, averaging down may exacerbate risk, and once the market continues to decline, losses will accelerate.
From 'A Little Bit' to 'Significant': The Upgrade of Floating Losses
However, the market does not always go as one wishes. When the initial 'a little bit' of floating loss continues to expand and gradually evolves into 'significant' floating loss, the psychological pressure on traders can multiply. At this point, account funds may shrink significantly, and the risk of liquidation looms large. Faced with such enormous floating losses, traders often become more anxious and hesitant:
Keep Holding On, Awaiting a Miracle: Some traders may still harbor fantasies, believing that the market will suddenly reverse, or even go all-in, attempting to average down their costs, waiting for a 'miracle' to happen. This approach is very dangerous, especially in high-leverage contract trading, as the market may not rebound as hoped and could instead accelerate its decline, ultimately leading to liquidation and total loss of capital.
Passive Liquidation, Leaving It to Fate: There are also traders who, facing significant floating losses, choose to completely abandon their positions, allowing prices to drop until their margin is insufficient, ultimately being forcibly liquidated by the exchange. While this method may seem 'carefree,' it is actually the worst choice, as it means you completely lose control and expose your funds to market risks.
Stop-Loss or Liquidation? The Choice Between Proactive and Passive
As floating losses continue to expand, traders must choose between 'stop-loss' and 'liquidation.' This is essentially a choice between being proactive and passive:
Proactive Stop-Loss (Cutting Losses): Stop-loss refers to the act of actively closing a position when losses reach a preset level to prevent further loss expansion. Stop-loss is a way to actively control risk, allowing traders to end trades under controlled loss conditions, preserving capital strength and waiting for the next trading opportunity.
Advantages: Effectively Control Risk, limiting the loss of a single trade to an acceptable range;Preserve Capital Strength, avoiding total depletion of account funds;Maintain Trading Mindset, avoiding the impact of significant losses on subsequent trading decisions.
Disadvantages: May lead to premature stop-loss, as sometimes market volatility can cause prices to rebound quickly after hitting the stop-loss level, resulting in 'stop-loss being the lowest point'; requires a certain level of trading discipline, as stop-loss must strictly follow the preset plan, overcoming human weaknesses and avoiding missing the best stop-loss timing due to indecision.
Passive Liquidation (Still Liquidated): Liquidation occurs when the account's margin rate falls below the minimum standard set by the exchange, resulting in forced liquidation. Liquidation is a passive acceptance of market risk, meaning the trader completely loses control over their position, and the final result is often severe losses.
Disadvantages: Huge and uncontrollable losses; liquidation means a single trade could result in losing all principal, or even owing money to the exchange (in some extreme cases); undermining trading confidence, as experiencing liquidation can create a significant psychological shadow for traders, affecting subsequent trading decisions; losing trading opportunities, as funds are locked in after liquidation, making it difficult to continue trading in the short term.
Advantages: Appears 'carefree,' requiring no active operation and handing decision-making power to the market, but this 'carefree' approach comes at the cost of enormous capital risk. (In reality, liquidation has almost no true advantages.)
How to Deal with Floating Losses? Risk Management is Key
In the face of floating losses, the correct coping strategy should be to proactively stop-loss to avoid passive liquidation. This is not just a trading skill but also reflects a risk management philosophy. Here are some suggestions to help you better cope with floating losses:
Set Reasonable Stop-Loss Levels: Before opening a position each time, you should set reasonable stop-loss levels based on your risk tolerance and trading strategy. The setting of stop-loss levels should have certain logic; for example, it can refer to key support and resistance levels from technical analysis or use indicators like ATR to assess market volatility and set dynamic stop-losses.
Strictly Execute Stop-Loss Plans: Once the price touches the preset stop-loss level, the stop-loss action should be executed without hesitation. Avoid relying on luck, arbitrarily changing or canceling stop-losses, and do not average down at a loss position in an attempt to reduce costs.
Control Position Size: Reasonable position management is an important component of risk control. The position size for each trade should not be too large and should be set based on account funds and risk tolerance, establishing a reasonable risk ratio for each trade. Even if a single trade incurs a stop-loss, the loss amount should not exceed the acceptable range of total account funds.
Maintain a Calm Mindset: It is crucial to maintain a calm and rational mindset during trading. Do not let floating losses lead to emotional loss of control, resulting in impulsive and irrational decisions. Trust that stop-losses are a normal part of the trading process, and every stop-loss is an opportunity for learning and improvement.
Summary
In cryptocurrency contract trading, floating losses are inevitable. Facing floating losses, traders must make a choice between 'stop-loss' or 'liquidation.' The wise choice is to proactively stop-loss, decisively cut losses, keep risks within an acceptable range, preserve capital strength, and wait for the next trading opportunity. On the other hand, passive liquidation is the worst choice, as it not only may lead to huge capital losses but can also severely undermine trading confidence.
Remember, risk management is the lifeline of contract trading. A reasonable stop-loss strategy, strict execution discipline, and a calm trading mindset are key to your long-term survival and profitability in the cryptocurrency market. I hope this article helps you better understand floating losses and master the correct methods to deal with them, allowing you to navigate the path of cryptocurrency contract trading more steadily and further.
Disclaimer: This article is solely for the purpose of educating and sharing trading knowledge and does not constitute any investment advice. Cryptocurrency trading carries a high risk; please invest cautiously according to your risk tolerance.
