In the field of cryptocurrency trading, perpetual contracts have become a highly regarded trading method. However, with the continuous expansion of its market scale, the phenomenon of liquidation in perpetual contracts has also frequently occurred, bringing significant risks and uncertainties to investors and the market.

The risk of liquidation in perpetual contracts

Perpetual contracts are a type of derivative with no expiration date, allowing investors to engage in long-term trading, thereby achieving leveraged trading and hedging. However, due to their unique trading mechanism, perpetual contracts also carry a high risk of liquidation.

Firstly, the leverage trading mechanism of perpetual contracts allows investors' losses to be rapidly magnified. When the market experiences severe fluctuations, the investor's margin may not meet the exchange's requirements, leading to liquidation.

Secondly, market manipulation and information asymmetry are also major reasons for liquidation in perpetual contracts. Some investors may exploit the asymmetry of market information by manipulating market prices to trigger liquidation and thus profit.

A reminder for beginners regarding exchanges: domestically, only EuYi and some An are reliable. EuYi is suitable for novice users, while some An is suitable for advanced users. Other exchanges that claim high returns and provide trading signals are just out to scam your capital; if you encounter such cases, directly blacklist them. Additionally, many people imitate the websites and apps of the two major exchanges to create fake software to scam money, so do not trust the exchange addresses found on Baidu casually.

What causes liquidation?

Spike behavior: This is very common and occurs on major exchanges. It is said to be caused by technical issues, but many times it is suspected whether it is also the exchange's behavior, which is hard to determine, as the exchange itself is a market. Considering its own profit and loss analysis, spikes can also be possible. Therefore, it is crucial to choose exchanges carefully, and the best way to avoid this is to use isolated margin or set stop-loss and take-profit orders.

Uncontrolled continuous position increase: when first placing an order in perpetual contracts, people generally have a clear understanding of the liquidation price position after placing the order. However, many do not consider their liquidation position after increasing their positions, which leads to many scenarios of liquidation. The best way to avoid this is to carefully consider the position and ratio for increasing positions right from the start.

The distorted mindset of recovering losses: after losing in perpetual contracts, many people develop serious psychological issues. For example, if you lose 100 USDT, you might hope to recover immediately, leading to an impulsive order that results in a loss of 200 USDT. This continues, causing an imbalance in mindset and leading to a loss of 400 USDT. Continuing like this, many times you might not face liquidation, as you could be lucky; like gambling, out of ten times, you might guess right once. Thus, in most cases, you won't face liquidation, but when you do, the loss can be significant, causing all your previous efforts to go to waste.

Continuous upward price without resistance leading to liquidation: This often occurs in coins that are continually rising because there is little resistance above. Most coins are absorbed by large players, so when there is basically no resistance above, the market makers can easily trigger liquidation. A very clear example is TRB, as very few retail investors hold it, making it a liquidation machine for contracts. The best way to avoid such liquidation is to refrain from touching coins like this, or besides Bitcoin and Ethereum, do not trade contracts for other coins early on.

Liquidation in a stable market: one principle of contracts is not to hold positions for too long. Perpetual contracts are not long-term investment products; they are financial derivatives. Therefore, it is best not to hold them for more than three days unless you are already in profit. Do not exceed three days; if you do and are still in a losing position, it is advisable to close your position promptly and look for opportunities to recover.

Liquidation of altcoins controlled by large players: This is also very common, especially for coins controlled by large players. Therefore, do not trade contracts for certain altcoins unless you can operate quickly and enter and exit fast; otherwise, liquidation is highly probable. Because the market maker knows your order position, when you place the order, and the liquidation price after your order, they are all well aware of this, so do not trade contracts for altcoins; they are all machines for harvesting profits.

Liquidation in a big market: whether in a sharp rise or fall, severe liquidation issues will occur. In such cases, both the bull and bear scenarios are highly likely to lead to liquidation. Therefore, in such markets, the fluctuation is very large, and the larger the fluctuation, the less suitable it is for trading contracts. Hence, this situation will inevitably lead to liquidation. To avoid this, if you want to profit in a highly volatile market, the best way is to open positions on both sides—going long and short—but you must watch the positions carefully and avoid liquidating one side, leading to liquidation on the other.

Why is there precise liquidation? Many people wonder why there is precise liquidation. There are two main reasons. The first core reason is that you are dealing with altcoins, and it is normal for altcoins to be controlled by large players since there may be very few participants. The market maker is very clear about your order position, so they also know where liquidation will occur. The second core reason is that you are in a highly volatile market. In a stable fluctuation scenario, if you try to catch the bottom or short, for example, if BTC has dropped 5% and remains stable at that position for an hour, you might think it has stabilized and go long, placing a 100x order while only leaving 1% margin; this will likely lead to liquidation. The reverse is the same; in a market that has risen 5%, if you think it won't go higher and then open a 100x short position, this problem can also occur.

Chasing shorts or longs: In a continuously declining or rising market, if there is suddenly a significant drop or rise in volume, many people will chase shorts or chase longs. For instance, if the 15-minute/30-minute/1-hour candlestick chart or RSI is declining, and suddenly there is a significant drop in volume, many might choose to chase shorts, leading to a situation where this wave actually rises in volume, resulting in liquidation.

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