What Does Liquidation Mean and How to Avoid It? — News T-rex.exchange

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What is margin trading?

Margin trading involves increasing the amount of money you have to trade with by borrowing third-party funds. Think of it as borrowing money from a stranger to buy bitcoin or another cryptocurrency. But in this case, you are borrowing from a crypto exchange. This allows investors to increase the size of their trading positions, also known as “leverage.”

What is liquidation?

In the context of cryptocurrency markets, liquidation refers to when an exchange forcefully closes a trader’s leveraged position due to a partial or total loss of the trader’s initial margin. It happens when a trader is unable to meet the margin requirements for a leveraged position (fails to have sufficient funds to keep the trade open.) Liquidation occurs in both margin and futures trading.

How to avoid liquidation

When using leverage, there are a handful of options available to mitigate the chances of being liquidated. One of these options is known as a “stop loss.”

  • Stop price: The price where the stop loss order will execute
  • Sell price: The price at which you plan to sell a particular crypto asset
  • Size: How much of a particular asset you plan to sell

Where to set a stop loss

When it comes to margin trading, risk management is arguably the most important lesson. Your primary goal should be to keep losses at a minimum level even before thinking about profits. No trading model is infallible. Therefore, you must deploy mechanisms to help you survive when the market doesn’t go as expected.

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