Understand the risks of liquidation in margins trading
The world of cryptocurrencies has experienced significant growth and volatility over the years, making it a lucrative market for traders. However, this growth also includes an increased risk, especially with regard to margins trading. One of the most important risks associated with margins trading is liquidation.
What is liquidation?
The liquidation occurs when the position of a merchant in a cryptocurrency fell below a certain threshold, which led to exhaustion or the reduction of the balance of his account. This can happen for several reasons, including:
- Unrealistic expectations: overvaluing and taking too many risks, resulting in a sudden drop in the price of cryptocurrency.
- Price volatility: the sudden and drastic decrease in price, which makes it difficult for merchants to recover their losses.
- Market handling: using false or handled orders to reduce prices and increase losses.
Risks associated with margin trading
The trading of the margins involves borrowing money from a broker to exchange cryptocurrencies. This increases the potential risk of liquidation, because the balance of the account of a merchant is now linked to the value of several positions. Some of the risks associated with margins trading include:
* Reduction of beneficiary margins
: At each additional position, the required margin may decrease, which makes it more difficult to maintain profitable transactions.
* The increased lever effect : The use of a higher lever effect increases the potential for significant losses, because a small price movement can cause substantial gains or losses.
* Risks of liquidation
: if the balance of the account of a trader falls below a certain threshold, its position can be liquidated, resulting in a loss of the whole amount.
The risks of liquidation
When the position of a margin trader is liquidated, it risks losing not only its initial investment, but also additional funds that have been borrowed from the broker. This can cause significant financial losses, which can be difficult to recover.
Certain specific risks associated with liquidation include:
* Losses : The most immediate concern for a merchant is the loss of the balance of their account, as well as all the additional funds that have been borrowed.
* Financial structure : Liquidation positions can put significant pressure on the financial resources of a merchant, which makes the coverage of subsistence costs or other financial obligations difficult.
* Regulatory risks : In some cases, the liquidation may trigger regulatory actions or penalties, such as fines or suspensions of commercial accounts.
Athorize the risks
Although there is no way to completely eliminate the risk of liquidation in margins trading, there are measures that traders can take to mitigate these risks:
* Diversify : The spread of investments on several cryptocurrencies and asset classes can help reduce global exposure to risks.
* Use stop-loss orders : The definition of a stop-loss command can limit losses if the price of a cryptocurrency moves in relation to the position of a trader.
* Monitor market conditions : Keep an eye on market trends and feeling can help traders adjust their strategies to minimize risks.
Conclusion
Marketing trading is a high -risk and high -reward activity that requires careful attention and planning. Although a certain level of risk is inherent in the market, it is essential for traders to understand the risks associated with liquidation and take measures to mitigate them. By diversifying investments, using stop orders and monitoring market conditions, traders can reduce their exposure to these risks.
Additional resources
* Bitcoin Trading Guide : A complete guide to buy and sell Bitcoin, including risk mitigation strategies.
* Margin trading 101 : an introduction to margins trading, covering the bases of the lever effect, the dimensioning of the position and the liquidity.