Bitget Beginner’s Guide — How to Avoid Liquidation

 

Overview

● Risk control: Futures trading is a high-risk investment activity. Before engaging in futures trading, it's essential to develop a detailed risk management plan.

● Fund management: Effective fund management and allocation can significantly reduce risks and prevent futures liquidation.

● Leverage ratio control: Controlling the leverage ratio is one of the important methods to avoid futures liquidation.

● Timely stop-loss implementation: Stop losses are more challenging than take profits.

What is Futures Liquidation?

Futures liquidation refers to a situation in futures trading where, due to rapid or significant market price changes, a user's account margin is insufficient to maintain the original futures position, leading to liquidation and settlement of losses. The principle of futures liquidation can be represented by the following formula: Margin rate = (account equity + unrealized PnL) ÷ (futures value × leverage). When the margin rate falls below the maintenance margin rate, a liquidation mechanism is triggered and the platform automatically closes all of a user's futures positions at the best market price and deducts the corresponding transaction fees and funding rates. If market price fluctuations are too large, resulting in an exit price lower than the bankruptcy price (i.e., the price when account equity is zero), a liquidation occurs. The user not only loses all the margin but may also need to compensate the platform or other users for losses.

Why is Liquidation Such a Common Occurrence?

The fundamental reason for futures liquidation is market price changes exceeding users’ expectations and capacity, causing insufficient margin to support the futures position.

Due to the leverage effect, futures trading carries very high risks. When prices move against you, it's essential to close positions promptly to prevent further losses. If you fail to do so, your margin will gradually decrease until it reaches the liquidation line. If your margin falls below this line, your position will be closed, and all funds will be liquidated.

Several common scenarios contribute to this:

Overweight positions: Some users, in pursuit of higher returns, opt for higher leverage or larger position sizes, leading to a lower margin ratio and greater risk exposure. This makes it easy to trigger the liquidation if the market moves adversely.

Lack of stop-loss orders: Some users, to avoid frequent stop-loss or miss rebound opportunities, choose not to set a stop-loss, resulting in an inability to control losses timely. This can easily lead to liquidation in the event of volatility.

Overconfidence and refusal to accept mistakes: When faced with market downturns, some users, driven by denial or self-comfort, are reluctant to acknowledge their misjudgments. Instead, they persist or even increase their positions, leading to escalating losses. Such behavior can easily lead to liquidation in the event of extreme market volatility.

How to Avoid Liquidation?

Control Leverage

How much leverage is too much, posing a risk of liquidation? The answer is: it depends on your leverage and margin levels.

For example, suppose you use $10,000 with 5x leverage to buy $50,000 worth of Bitcoin, which means you've put in a 20% margin. If Bitcoin's value appreciates by 20% the next day, the value of the Bitcoin you hold becomes $60,000, earning you $10,000. Since your principal is only $10,000, this equates to a 100% ROI. However, if Bitcoin falls by 20% the next day, you would lose $10,000, effectively losing your principal. If losses continue, the funds you borrowed from the platform are also jeopardized, so the platform may resort to forcibly selling your Bitcoin to recover the lent funds and interest, resulting in the closure of your position. In this case, you lose your money and your Bitcoin, with no chance to wait for a potential price recovery, leading to complete liquidation.

In fact, for futures trading beginners, it is crucial to choose a leverage and position size that aligns with their financial situation and risk tolerance when opening positions. Generally, the margin should be maintained above 10%, and the leverage should be kept below 10x.

Set a stop-loss

Controlling leverage can mitigate liquidation risks to some extent, but given the high volatility of the cryptocurrency market, even well-managed leverage can be overcome by significant market fluctuations. Therefore, on top of managing positions wisely, setting a stop-loss point/line is also necessary.

A stop-loss can be seen as part of your exit strategy for every trade. Once the price hits a predetermined level, these orders are executed, closing your long or short positions to minimize losses. Whether you prefer using candlestick charts, trend lines, or technical indicators for trading, setting stop-loss allows you to not worry about exiting a trade or second-guessing your decisions. For example, a trader establishing a long position based on an ascending triangle can quickly determine where to set it. The height of the triangle's Y-axis can provide a potential target, while the hypotenuse indicates a point of invalidation.

We strongly recommend setting a stop-loss/exit point for each futures trade, as no one can predict what will happen in the cryptocurrency market on any given day. Thus, a stop-loss helps shield you from the impact of unforeseen events and gives you a better idea of what to expect from each position you open. Setting a stop-loss on Bitget is straightforward. Go to Futures, select TP/SL, and enter the amount in the SL Price. Bitget allows up to 20 stop-loss settings for futures trading, offering efficient protection for your futures account's principal.

Suppose that you bought a BTCUSDT futures on Bitget Futures Trading at a price of $10,000. In order to minimize potential losses in this trade, you might set a stop-loss at a price 20% lower than your purchase price (i.e., $8000). If the price of BTCUSDT falls below $8000, your stop-loss order would be triggered. The exchange then sells the futures at the current market price, which might be exactly at $8000 or significantly lower, depending on the market conditions at the time.

It's important to note that stop-loss is not foolproof against liquidation. In the volatile cryptocurrency market, liquidation prices may change, and setting a stop-loss can only reduce, not eliminate, the risk of liquidation. For novice users, this might be the only "unfriendly" aspect, so it's crucial to determine and stick to the maximum loss amount you're willing to accept before engaging in futures trading. The most straightforward approach is "investment per order = maximum stop-loss amount", meaning that after assessing their maximum loss per trade, users should base their order placements on that figure.

Fund Management

Fund management is a widely recognized method for adjusting position sizes to reduce risk while maximizing the growth potential of a trading account. This strategy involves limiting the capital allocated to any single trade to a certain percentage of the account value. For beginners, a reasonable range is 5% to 10%, with the USD value adjusted as the account value changes, ensuring that traders don't overexpose their entire account to a single position.

Given the unpredictability and volatility of cryptocurrencies, investing in high-leverage derivatives like perpetual futures can lead to the loss of all invested capital in minutes. Therefore, investors should adhere to stricter limits; a general rule of thumb when trading volatile assets is to risk only 5% to 10% of capital on a specific trade.

For example, if you have $10,000 in your Bitget futures account, you would allocate $500–$1000 for each trade's risk. If a trade goes south, you would only lose 5% or 10% of the funds in your account. Effective risk management means having the right position size, knowing how to set and move stop-losses, and considering the risk/reward ratio. A robust fund management plan allows you to build a portfolio that won't keep you up at night.

However, while fund management can reduce your risks, it's crucial not to overtrade. Overtrading happens when you have too many open interests or take disproportionate risks in a single trade, exposing your entire portfolio to excessive risk. To avoid overtrading, adhere to your trading plan and maintain the discipline of your pre-planned strategy.

Most novice traders are infamous for overtrading, often driven by uncontrolled emotions like greed, fear, and excitement. While traders can make substantial profits by opening numerous positions, the losses can be equally devastating. A prudent approach is to set a cap on the amount of capital at risk at any time.

For instance, if you have 25 futures trades open, with each trade risking 1%, there's a chance that all 25 trades could move against you simultaneously (as almost anything can happen in the cryptocurrency market), leading to a significant 25% loss in your portfolio.

Beyond the risk in each trade, you should also consider the cumulative risk amount in your entire portfolio, also known as total risk capital. As a general rule, your total risk capital should be below 10% of your portfolio, meaning if your risk per trade is 1% of your portfolio, the maximum number of open positions should be 10.

Final Thoughts

Liquidation risk is a challenge every investor faces when trading futures, hence learning how to avoid it is crucial. The strategies outlined in this article, such as setting an appropriate leverage, establishing stop-loss points, and managing funds to reduce risk, are all effective risk control measures that can help investors achieve more stable profits in futures trading. Moreover, before engaging in futures trading, investors are advised to familiarize themselves with the rules of Bitget and market trends to make accurate market predictions.