Understanding the concept of Liquidation in Cryptocurrency and how to avoid it.

There are some concept we need to get ourselves familier with in the crypto space and one of this concept is the concept of liquidation. I believe a lot have heard about this word but many of us doesn't really know what it is all about.

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Today in this article I will be discussing in details what liquidation is all about and how to avoid it as a crypto trader. I know most of us here don't trade crypto but having the knowledge alone will go a long way in helping you to guide others or yourself anytime you eventually start trading future market.

Without further ado, I will like us to go straight into the discussion of the day in more details. Please read till the end as you will definitely get one or more things that will be added to your already stored knowledge.

What is Liquidation in Crypto?

The word liquidation in crypto happens when the trader doesn't have enough funds to maintain the leverage position in his or her trade. What this means is that if a trader opens a future trade without a proper stop loss and the trade goes against the trader, you will be at a loss of all or some of your funds and the exchange most times closes the trade automatically.

So when you loss all or part of your capital in a trade due to price movement against you then we can say that your asset has been liquidated. Liquidation happens more when using leverage trading. When the account doesn't have enough money or funds again to hold and keep the trade then liquidation will set in.

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If you have enough funds and you didn't restrict it, i.e putting a stop loss, it will continue draining until almost all the money is gone but the trade will still be on because the fund is much. So liquidation only occurs when the market has drained all the money present.

So exchanges help traders especially those who leverage while trading to close their position when the market goes much against them through liquidation. This means that the exchange will automatically close the trade and then keep the remaining asset safe for the trader.

Liquidation of an asset in every trade depends on the leverage use in the trade. For instance, if two persons enter same market with $10 each and both of them uses different leverages for their trade, the one with the higher leverage has high chances of getting liquidated faster than the one with a lower leverage.

Just like the risk involve in using high leverage leads to fast liquidation, the profit made is also massive if the market goes in your favour. So as a trader, it is good you understand the concept of leverage and how to use it first before going into any trade.

Let me give you a life example. When I started trading firstly, I entered the market with $20 and then I used 20x leverage and the market with split of seconds went in my favour and I was able to make close to $30 gain. I was amazed how my asset suddenly increased.

Since I didn't understand the concept of leverage very well, I increase the leverage to 50x in the next trade and withing seconds I noticed that my account was liquidated because I didn't put stop loss in the trade. So the higher the leverage the more profit you will make if market goes in your favour but if market goes against you, you will be quickly kicked out of the market.

Now let's see a little arithmetic on how we can use leverage to calculate how long we can stay in the market if the market goes against us.

Liquidation = 100% / leverage amount

Example: If you enter a market with a 10x leverage, then the calculation of when you will be kicked out from the market will be

Liquidation = 100/10 = 10%

This means that if you are in the market, and the market goes against you by 10% then the exchange will automatically close your trade because of the leverage position you have taken.

How Does Liquidation Occur & how can it be minimize?

Liquidation occurs when you use leverage to trade. Leverage is borrowing money from an exchange and when the price goes against you up to a certain level, they exchange will kick you out of the trade to keep the investment so that you don't lose everything including their collateral.

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So liquidation occurs always when the market goes against you to some certain level that is when the criteria set for the trade is not met any longer. This is the major way which liquidation occur. Now let's look at the various ways to minimise the risk of liquidation in our trades.

Proper stop loss: One of the ways to minimise liquidation is by setting a proper stop loss. Everytime you trade you can minimise your risk by placing a good stop loss do that if the market goes against you a little it should kick you out of the market and you will still have enough funds to enter the trade again. You are risking only a little portion of your funds here.

Profile diversification: To avoid liquidation or to minimise it you can think of diversifying your portfolio as it will help you to recover one one or more of the token is not doing well.

Use a low leverage: To minimise loss you should consider using a low leverage at all times. It is better to go slow and steady than to go too fast and crash.

Know the market trend: Have a basic knowledge about the market trend so that anytime the market is going against you you will easily change your direction and also you can be able to analyse the market before entering it at all times.

Conclusion

The concept of liquidation in the crypto market is an important concept everyone needs to know especially those who are leverage traders. The leverage we use for our trade determines how long we stay in the market. From the calculation above you will notice a lower leverage keeps is longer in the market than a higher leverage.

Whichever leverage we use has its advantages and disadvantage but I recommend that every newbies on trading shouldn't use more than 5x leverage on their trade no matter what. Slow and steady is the best way to go when it comes to crypto trading.

member also that trading is like meditation, patience is the key. Always wait for the market to come to you and not for you to go to the market. Learn to identify your key support and resistance level and also trade with the trend and in that way, you will be a successful trader.

Finally, I want to thank you all for reading through my post today. If you have any questions or contributions, please do well to use the comment section of this post. See you all in my next publication.

Disclaimer: ^{This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your research and consult a financial advisor.}