The biggest difference between contracts and spot trading is leverage. For example, on January 3, 2024, there was breaking news that the Bitcoin ETF would not be approved, and BTC plummeted 10% in an instant, with many altcoins dropping 20%. If you bought Bitcoin with 10X leverage at that time, you would be liquidated. Later, BTC rose to $45,000 on January 8, but that no longer concerns you. If you held the spot, it’s clear that your losses on that day were much less than those of your A-shares. So, in contracts, you earn from short-term volatility. If you hold contracts long-term, you might have to pay very high funding rates. The fundamental reason you engage in contracts is that you want to trade short-term, make a large profit, and then exit.
Basic concepts you need to understand before trading contracts.
Isolated margin, full margin, funding rates, long/short ratios, leverage position limits, the leverage multiplier used for trading, contract open interest, how to calculate fees, etc., if you don't understand these, you can check Baidu; the content is quite basic, so I won't elaborate here.
Returning to my own trading system.
I mainly focus on intraday trends, primarily trading based on the 15-minute line. This is a habit similar to T0 trading in stocks, and it's not too difficult. In this trend, I find my appropriate leverage and engage in high-probability trades multiple times and frequently. Over time, the power of compound interest comes into play. Sometimes, I might execute hundreds of trades in a day. Therefore, it's essential to find exchanges with rebate programs, and you can look for my referral code with a high rebate ratio. Remember the wave of ORDI and SOL in December, which helped my account grow from 400,000 to over 700,000; I made a total profit of 7,000 during the significant volatility of ORDI, with total trades being several hundred per day, and the highest single-day profit reaching $18,000.
My approach is 'small position, large number of trades, targeting high volume, and a market that is bullish'. After all, if the volatility is insufficient, each trade may not yield enough profit, leading to excessive trading and high fee losses. Then, on the evening of January 3, news of significant volatility came, and the news of Bitcoin's spot ETF rejection caused all altcoins to drop directly by 20%. I experienced my first single-day loss of over $10,000, approaching -$12,000, and at that time, I summarized the issue I faced: I had not strictly set my stop loss. In the following days, I had my first single trade profit of over $10,000 (Ethereum), and later on, I also capitalized on the surge of Pepe.
Always set a stop loss immediately after placing an order in contract trading.
Cryptocurrencies can spike up or down due to just one or two pieces of news, and there are numerous cases of double liquidations. Moreover, with 24-hour trading, you could be liquidated while you sleep, so it's crucial to develop a habit of setting stop losses. Additionally, I generally engage in trend trading; if a trend trade goes wrong, do not hold the position, because sometimes once the consensus is established, it can lead to price movements of 100% in either direction. No amount of money can withstand that. For instance, look at TRB in December, which continuously rose from around 120 to over 700 in ten trading days without any pullback. If you were shorting, you would have been liquidated even with 0.5x leverage. Therefore, don't wait until you are liquidated to realize the importance of stop losses.
Definitely do not gamble.
Never harbor any illusions, because you are trading contracts. If you get it right nine out of ten times, earning lots, but if you are stubborn on the tenth wrong time, you will face 100% liquidation. Being liquidated can have a huge impact on your confidence and mindset, so I recommend that once a contract loss exceeds 30%, you should close the position and take a break to evaluate if you made a mistake. In the cryptocurrency market, a 20% fluctuation over two days is very normal, and you will encounter it daily. Therefore, to succeed in the long term, you must avoid those factors that could lead to failure.
If you are new to the cryptocurrency market and your total assets exceed 20% in digital currency, please immediately withdraw this proportion to below 10%. Otherwise, such volatility will keep you awake at night and affect your trading.
To reduce the risk of liquidation and clearing, the following strategies can be adopted.
1. Reasonably control leverage multiples.
All leveraged traders should keep in mind: the higher the leverage, the greater the risk. For novice traders, it is strongly recommended to use no more than 3x leverage to avoid excessive risk amplification.
For example: If the account balance is 1,000 USDT and using 3x leverage, you can control a position of 3,000 USDT, which carries less risk compared to a 10x leverage position of 10,000 USDT. Earning less is okay as long as you preserve your principal.
2. Set stop-loss levels in advance.
Stop-loss is an important risk control tool to avoid liquidation. Traders can set a stop-loss price when opening a position.
For example: If you go long on BTC with 100,000 USDT, you can set your stop loss at 98,000 USDT (a loss of 2%). If the market price drops to this point, the system will automatically close the position to limit losses.
3. Maintain sufficient margin.
When market volatility increases, maintaining a higher margin ratio can effectively reduce liquidation risk. For example, if the exchange's maintenance margin rate is 0.5%, it is advisable to prepare 3-5 times the additional funds as a buffer. When the price approaches the liquidation point (upon receiving a liquidation notification), timely adding margin can keep the account sufficiently funded and reduce position risk.
4. Observe the market liquidation heatmap +
Through the liquidation heatmap, you can observe which price ranges have a large number of liquidations and predict potential areas of severe price volatility. Investors can adjust their entry and exit plans based on this data to avoid entering high-risk areas.
For example: If the heatmap shows a large number of liquidation orders between 100,000~98,000 USDT, this indicates that this range may become market support or resistance.
5. Diversify investments to reduce the risk of single positions.
Do not put all your funds into a single position; instead, diversify across different trading pairs or reduce the leverage of a single trade. This way, even if one trade is liquidated, some of your funds remain unaffected.
For example: If you have 5,000 USDT, you can allocate 2,500 USDT to BTC and 2,500 USDT to ETH to reduce the impact of single-market volatility. It is important to note that the entire cryptocurrency market often declines simultaneously; this strategy may not always be effective, but a reasonable allocation of altcoins and mainstream coins can help reduce risk.
It can be observed that this major drop affected even top five mainstream coins like ETH and SOL, which fell over 30% from their highs. This indicates that leverage over 3x could lead to liquidation, which is also why we previously mentioned 'liquidations in a bull market' in our articles on bullish price trends.
6. Monitor market trends and major events.
Market news, macroeconomic data, policy changes, etc., will all affect Bitcoin's price. For instance, during FOMC meetings or CPI data releases, the market often experiences significant fluctuations. Approval or rejection of ETFs, as well as changes in regulatory policies, can also impact market confidence.
Investors should closely monitor these key events and adjust their positions in a timely manner to reduce the liquidation risk brought about by drastic market fluctuations!
While leveraged trading can amplify profits, it also magnifies risks. Although it is encouraged to avoid a gambling mindset and focus primarily on researching projects and holding spot positions, if you still want to trade with leverage, understanding the mechanisms of positions and liquidations is very important.
By implementing reasonable leverage control, stop-loss settings, preparing sufficient margins, observing market heatmaps, and diversifying investment targets, you can effectively reduce the possibility of liquidation.
If you are a new cryptocurrency trader or encountering contracts for the first time, while the leverage limits on exchanges may seem enticing, it is still advisable to start with low-leverage trading and learn to observe market trends and manage risks to avoid significant losses due to leverage, which could result in an immediate exit from the market!
