To avoid contract liquidation, investors should have the following abilities: risk management skills. Contracts are high-risk investments, and before trading contracts, you need to develop a detailed risk control plan; proper capital management skills. Rational fund management/allocation can effectively reduce risks and prevent contract liquidation; control leverage ratio. Managing leverage is one of the key ways to avoid contract liquidation; set timely stop-loss orders. Stopping losses is often more difficult than taking profits.
Contract liquidation occurs when market price fluctuations are too rapid or large, causing a user’s account margin to be insufficient to maintain their open contract positions, leading to forced liquidation and losses. The principle of contract liquidation can be expressed with the following formula:
Margin Ratio = (Account Equity + Unrealized Profit and Loss) / (Contract Value * Leverage Ratio)
When the margin ratio falls below the maintenance margin rate, the forced liquidation mechanism is triggered, meaning the platform will automatically liquidate all of the user's contract positions at the best market price. If the market price fluctuates too drastically, causing the liquidation price to be lower than the bankruptcy price (the price at which account equity becomes zero), the user will not only lose all margin but may also need to compensate the platform or other users for the loss.
The fundamental cause of contract liquidation is that market price fluctuations exceed the user's expectations and risk tolerance.
Due to leverage effects, contract trading carries extremely high risks. When prices move unfavorably, investors need to close positions in time to prevent further losses. If positions are not closed in time, the margin will gradually deplete until it reaches the liquidation threshold. If the investor's margin falls below this threshold, the contract will be forcibly liquidated, and all funds will be lost.
How to Avoid Contract Liquidation
Control Leverage
The liquidation threshold depends on the leverage ratio and margin level.
For example:
Suppose an investor uses $10,000 plus 5x leverage to buy $50,000 worth of Bitcoin, meaning they invested 20% as margin. If Bitcoin rises by 20% the next day, the value of their position increases to $60,000, resulting in a $10,000 profit. Since the investor's initial capital was $10,000, this equates to a 100% return. Conversely, if Bitcoin drops by 20% the next day, the investor incurs a $10,000 loss, wiping out their entire principal. If losses continue, the platform will forcefully sell the investor’s Bitcoin holdings—this is forced liquidation, also known as total liquidation.
For beginners in contract trading, it is advisable to choose an appropriate leverage ratio and position size based on personal funds and risk tolerance. Avoid excessive greed or fear. Generally, the margin ratio should remain above 10%, and leverage should be kept below 10x.
Set Stop-Loss Orders
While controlling leverage can reduce liquidation risks, the crypto market is highly volatile. Even with controlled leverage, market fluctuations can still impact positions. Therefore, in addition to reasonable position control, investors should set stop-loss points.
JuCoin strongly recommends setting a stop-loss/exit point for every contract trade, as no one can accurately predict crypto market fluctuations. Stop-loss orders protect investors from unexpected situations and help manage expectations for each position.
Setting a stop-loss order on JuCoin is simple. For example, if an investor buys Bitcoin at $10,000, they can set a stop-loss order at a price 20% lower (i.e., $8,000) to minimize potential losses. If the BTCUSDT price drops below $8,000, the stop-loss order is triggered, and the exchange will sell the contract at the current market price.
However, stop-loss orders do not completely prevent forced liquidation. In the crypto market, liquidation prices may change. Setting a stop-loss can reduce the risk of liquidation but cannot fully eliminate forced liquidation. Therefore, before trading contracts, investors must determine and fix the maximum loss they are willing to accept.
Capital Management
Capital management is a strategy to reduce risk while maximizing the growth potential of a trading account. This strategy limits the capital allocated to any single trade to a certain percentage of the account balance. For beginners, a 5%-10% risk allocation per trade is considered reasonable.
Due to the unpredictability and volatility of cryptocurrencies, when investing in highly leveraged derivatives like perpetual futures, investors may lose their entire principal in a short time. Therefore, investors should adhere to stricter limitations and only risk 5%-10% of their capital per trade.
For example, if an investor has 10,000 USDT in their JuCoin contract account, they should allocate only 500-1,000 USDT to any single trade. If the trade goes wrong, the investor will only lose a maximum of 5%-10% of their funds. Proper risk management involves the correct position sizing, reasonable stop-loss settings, and risk/reward considerations.
It is important to note that while capital management reduces investment risk, overtrading should be avoided. If an investor holds too many open orders at once or takes on excessive risk in a single trade, their entire portfolio will face significant risk. Therefore, it is crucial to strictly follow a trading plan and maintain discipline.
Most trading beginners suffer losses due to overtrading, often driven by greed, fear, or excitement. While opening multiple orders may lead to high profits, it can also result in devastating losses. Thus, investors should set risk limits for all orders and avoid exposing their entire portfolio to excessive risk.
Final Thoughts
In contract trading, liquidation risk is an issue every investor faces. Therefore, investors must learn how to avoid liquidation. This guide introduces strategies such as setting appropriate leverage ratios, placing stop-loss orders, and implementing capital management to reduce risk—these are effective risk control measures that can help investors achieve more stable returns in contract trading.
Before engaging in contract trading, investors are advised to fully understand JuCoin’s platform rules, market trends, and other relevant information to make well-informed trading decisions.