Liquidation

Liquidation in cryptocurrency is a terminology used predominantly in cryptocurrency trading marketplaces. It refers to the situation where a trader's positions are forcibly closed due to significant losses. It's typically triggered when the market moves against the trader's bets, and their losses approach the total value of their collaterals put up to support these bets.

How does Liquidation happen?

• If the asset's price moves in favour of the trader, they win and make profits proportional to the value of their positions and vice versa.

• If the asset's price moves against the trader, they incur a loss. If this loss approaches the total value of their own funds used as collateral, the exchange or broker will issue a "margin call", asking the trader to additional funds to their account.

• If the trader is unable to add funds, or the market moves very quickly before they can do so, their positions are forcibly closed or "liquidated". All collateral may be lost in the process.

Why is Liquidation in Cryptocurrency important?

Liquidation acts as a protection mechanism for cryptocurrency exchanges and brokers by minimizing their exposure to risky traders. For traders, it is a risk they must manage when using leverage to increase the size of their bets. A better understanding of liquidation and adequate risk management strategies are critical for anyone considering high-leverage crypto trading.

How to avoid Liquidation?

• Manage leverage wisely: More leverage doesn't always mean more profits. It could also lead to more losses. It’s important to understand the risks before engaging in high-leverage trading.

• Use stop-loss orders: Stop-loss orders can help manage risks in volatile markets. It’s a trade order to sell a cryptocurrency when its price falls to a certain level, thereby limiting your loss.

• Keep an eye on the market: Stay updated with market trends to better predict asset price movements. Unforeseen market events can lead to abrupt price changes resulting in liquidations.