How can contracts avoid liquidation? What are the reasons for contract liquidation?
Contract trading is a high-risk, high-reward investment method. However, due to the nature of leveraged trading, contract trading is also prone to liquidation. So, what are the reasons for contract liquidation?
1. Insufficient funds: Liquidation occurs when the funds in your margin account are insufficient to cover the maintenance margin at the current market price.
2. Market volatility: Sudden market fluctuations can affect your margin account. If the price reverses significantly, your leveraged position may be forced to close.
3. Strategy errors: Investors' investment strategies may not be optimal; operational mistakes can lead to contract liquidation.
4. Uncontrollable risk events: Black swan events (such as widespread network failures or large-scale power outages) and gray rhino events can cause market volatility and lead to contract liquidation.
How to avoid contract liquidation?
Avoiding contract liquidation is an important issue that every contract trader should focus on. Here are some methods that can help you reduce losses caused by contract liquidation:
1. Careful risk management
Contract trading is a high-risk investment behavior. Before engaging in contract trading, you should develop a detailed risk management plan. This plan should include your expected risks, potential black swan events, and a detailed plan for solutions. This way, if the market encounters unexpected situations, you will have a pre-planned solution.
2. Reasonable fund allocation
Diversifying your investment can effectively reduce risks and avoid contract liquidation. You should prudently allocate funds, ensuring that no single asset in your portfolio exceeds 25% of your total funds.
3. Control leverage ratio
Controlling the leverage ratio is one of the important methods to avoid contract liquidation. A suitable leverage ratio can balance returns and risks. Generally, the leverage ratio before contract trading should be below 5 times, which can effectively reduce risks.
4. Timely stop-loss
When conducting contract trading, you should clearly define stop-loss points and execute stop-loss timely. This can help you cut adverse trades in time and reduce losses.