Avoiding Liquidation in Crypto Leverage Trading: A Bitcoin Trading Strategy

How to Avoid Liquidation When Trading Cryptocurrencies with High Leverage

Imagine being in a very nice trade, but suddenly the market turns around and you get completely wrecked and liquidated. In this article, we will be discussing how to not get liquidated even when using high leverage while trading cryptocurrencies. We will show you exactly what to do so you will have literally zero chance of getting your trading account instantly destroyed.

The Problem with Leverage and Volatility

The majority of people want to increase their profits, so they borrow money from an exchange. This can easily be done with leverage. However, there is a problem when it comes to trading cryptocurrencies because they are very volatile. This volatility makes them a prime target for liquidations.

Liquidation occurs when an investor cannot meet the margin requirement for their leveraged position. Unfortunately, this happens every day. Traders often do not know how to use leverage properly to their advantage while trading Bitcoin, ethereum, and other cryptocurrencies. This is most likely because they do not understand what leverage even is.

When we borrow funds to increase our trade position size, it can multiply our gains. However, it is a highly risky move because it can also massively increase our losses if the market moves against our leverage position. With high leverage, there comes something called a liquidation price. At this price, our entire position will be forced to get closed, and we will lose the entire margin of the position. Even worse, we can lose the entire account balance. This happens because there are insufficient funds or margin in the position to keep the trade open, so the exchange is forced to close the trade to cover our loss.

Understanding Leverage and Liquidation Price

Let’s take a quick example using the Bitget Exchange. On Bitget, there is an option to use up to 125x leverage. However, using such high leverage is super risky and definitely not recommended. Let’s say we use 10x leverage for a simple long position.

What this means is that the margin to open the trade is going to be 10 times less than the actual position size. But now, if the market moves only 10 percent in the wrong direction of our trade, we will get liquidated. This is because 10x leverage times 10 percent is 100 percent, which is our liquidation price.

Leverage enables us to use a bigger position size with less capital. However, it does not matter how high of a leverage you use. On Bitget Exchange, there is a calculator available for you to calculate your profit and loss based on your leverage and position size.

The Importance of Position Size and Stop Loss

The most important thing when it comes to trading is how much profit we make on a trade. The specific trade we make will determine our profit. To calculate our position size, we need to consider our leverage and margin. Position size is calculated by multiplying leverage and margin.

It is crucial to properly calculate our position size to avoid liquidation. Position size is dependent on our stop loss placement. Instead of relying on a liquidation price, we should rely on a stop loss order. On Bitget, it is simple to set a stop loss when entering a trade. This allows us to close the trade at a specific price and avoid liquidation.

Risk management and trading psychology are key factors in successful trading. Beginner traders often look for a perfect trading strategy with a high win rate. However, over the long run, a 100% win rate strategy does not exist. Instead, we should focus on risk management, which includes proper position sizing and stop loss placement.

Calculating Position Size and Risk

To calculate our position size, we need to consider our stop loss placement and the amount we are willing to risk per trade. Generally, we should risk between 1% to 3% of our entire trading portfolio per trade. However, this does not mean setting a stop loss at 1% to 3%. It means that if we lose a trade, we will lose 1% to 3% of our trading portfolio.

Let’s say our entire trading portfolio is $1,000, and we want to risk 1% per trade. If we set a stop loss at 1.27%, we can calculate our position size by dividing the amount we are willing to risk ($10) by the percentage of our stop loss (1.27%). The result is $787, which is our position size.

Using leverage, we can borrow money to achieve this position size. For example, if we use 10x leverage, our margin needs to be $78.7. This allows us to trade as if we had $1,000 on the exchange, even though we only transferred $500. It is important to set a stop loss at a level that ensures the liquidation price is not hit before our stop loss.

The Misconception of Changing Leverage Mid-Trade

One common misconception is that changing leverage once you are already in a trade affects the profit and loss. This is not true. Changing leverage mid-trade only allows you to adjust the margin of the trade. It does not affect the profit and loss, which is based purely on the position size.

Conclusion

To avoid liquidation and not get liquidated while trading cryptocurrencies with high leverage, it is recommended to use lower leverage, preferably below 10x. This ensures that the liquidation price is far away from our trade entry. Instead of relying on a liquidation price, it is crucial to use a stop loss order to exit the trade if it goes in the opposite direction.

Risk management and proper position sizing are key to successful trading. By calculating our position size based on our stop loss placement and the amount we are willing to risk per trade, we can avoid liquidation and protect our trading account.

Remember, trading success is not solely dependent on the trading strategy. Risk management and trading psychology play a significant role. Cut losses early, make sure winning trades are bigger than losing trades, and always use a stop loss order to protect your capital.

Frequently Asked Questions

Q: What is leverage in cryptocurrency trading?

A: Leverage in cryptocurrency trading allows traders to borrow funds from an exchange to increase their trade position size. It enables traders to trade with more capital than they actually have, potentially amplifying both gains and losses.

Q: How does leverage affect liquidation?

A: Leverage increases the risk of liquidation. When using leverage, traders need to maintain a certain margin to keep their trade open. If the market moves against their leverage position and the margin requirement cannot be met, the trade will be liquidated, resulting in a loss.

Q: How can I avoid liquidation when trading with high leverage?

A: To avoid liquidation, it is recommended to use lower leverage, preferably below 10x. This ensures that the liquidation price is further away from the trade entry. Additionally, setting a stop loss order at an appropriate level can help protect against liquidation.

Q: What is the importance of position size and stop loss?

A: Position size and stop loss are crucial for risk management in trading. Properly calculating the position size based on risk tolerance and setting a stop loss order at an appropriate level can help protect against excessive losses and avoid liquidation.

Q: Can I change leverage mid-trade?

A: Yes, it is possible to change leverage mid-trade. However, changing leverage only allows you to adjust the margin of the trade. It does not affect the profit and loss, which is based on the position size.