How to Avoid Liquidation in the Binance Future Market

by May 15, 2023DEX/CEX0 comments

How to Avoid Liquidation in the Binance Future Market? Binance Futures is a platform that allows traders to speculate on the future price movements of various cryptocurrencies using leverage. Leverage is a tool that enables traders to amplify their profits by borrowing funds from the platform. However, leverage also comes with risks, such as liquidation.

Liquidation is a process that occurs when a trader’s margin balance falls below the maintenance margin requirement for their open positions. When this happens, the platform automatically closes the trader’s positions at a loss to prevent further losses for the platform and the trader.

Liquidation can be a devastating experience for traders, as it can wipe out their entire account balance in seconds. Therefore, traders must understand how liquidation works and how to avoid it.

This article will explain what liquidation is, how it is calculated, and what strategies you can use to minimize your liquidation risk when trading on Binance Futures.

Binance Future

What is Liquidation?

Liquidation is the forced closure of a trader’s leveraged positions when their margin balance falls below the maintenance margin requirement. The maintenance margin is the minimum amount of funds that a trader must have in their account to keep their positions open.

The maintenance margin requirement depends on the trader’s leverage level and position size. The higher the leverage and the position size, the higher the maintenance margin requirement. The maintenance margin requirement can be expressed as a percentage of the position value, called the maintenance margin rate.

For example, if a trader uses 20x leverage and opens a long position worth 1000 USDT on a BTCUSDT futures contract, their position value is 20,000 USDT (1000 x 20). If the maintenance margin rate is 0.5%, their maintenance margin requirement is 100 USDT (20,000 x 0.005).

The margin balance is the amount of funds a trader has in their futures account, which can be used as collateral for their leveraged positions. The margin balance consists of the initial margin and the unrealized profit or loss.

The initial margin is the number of funds a trader deposits or transfers to their futures account to open a leveraged position. The initial margin requirement depends on the trader’s leverage level and position size. The lower the leverage and the position size, the lower the initial margin requirement. The initial margin requirement can be expressed as a percentage of the position value, called the initial margin rate.

For example, if a trader uses 20x leverage and opens a long position worth 1000 USDT on a BTCUSDT futures contract, their position value is 20,000 USDT (1000 x 20). If the initial margin rate is 5%, their initial margin requirement is 1000 USDT (20,000 x 0.05).

The unrealized profit or loss is the difference between the entry and market prices of the trader’s open positions. The unrealized profit or loss reflects how much money the trader would make or lose if they closed their positions at the current market price.

For example, if a trader uses 20x leverage and opens a long position worth 1000 USDT on a BTCUSDT futures contract at an entry price of 50,000 USDT per BTC, their position value is 20,000 USDT (1000 x 20). If the current market price of BTCUSDT is 51,000 USDT per BTC, their unrealized profit is 1000 USDT (20 x (51,000 – 50,000)). If the current market price of BTCUSDT is 49,000 USDT per BTC, their unrealized loss is -1000 USDT (20 x (49,000 – 50,000)).

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How Is the Margin Balance Calculated?

The margin balance can be calculated by adding the initial margin and the unrealized profit or loss:

Margin Balance = Initial Margin + Unrealized Profit/Loss

The margin ratio is a metric that measures how close a trader is to liquidation. The margin ratio is calculated by dividing the maintenance margin by the margin balance:

Margin Ratio = Maintenance Margin / Margin Balance

The higher the margin ratio, the higher the liquidation risk. When the margin ratio reaches 100%, some or all of the trader’s positions will be liquidated.

The liquidation price is when a trader’s positions will be liquidated if they do not add more funds to their account or reduce their position size. The liquidation price depends on the direction, size, entry price, and leverage of the trader’s positions.

The liquidation price can be calculated using the following formula:

Liquidation price = Entry Price * [1 ± 1 (Initial Margin Rate – Maintenance Margin Rate)] ±1 (Extra Margin Added) / Contract Size

You must substitute -1 for a Long position and +1 for a Short position.

For example, if a trader uses 20x leverage and opens a long position worth 1000 USDT on a BTCUSDT futures contract at an entry price of 50,000 USDT per BTC, their position value is 20,000 USDT (1000 x 20). If the initial margin rate is 5%, the maintenance margin rate is 0.5%, and no extra margin is added, their liquidation price can be calculated as follows:

Liquidation price = 50,000 * [1 – 1 (0.05 – 0.005)] – 1 (0) / 20

Liquidation price = 25,100 USDT per BTC

This means that if the market price of BTCUSDT falls below 25,100 USDT per BTC, the trader’s long position will be liquidated.

How to Avoid Liquidation?

Liquidation can be a costly mistake for traders, resulting in losing their entire margin balance and paying a liquidation fee to the platform. Therefore, traders must take preventive measures to avoid liquidation and protect their capital.

Here are some strategies that can help traders minimize their liquidation risk when trading on Binance Futures:

1. Develop a trading plan

Planning trades ahead of time can be the most effective way to decrease the possibility of liquidation. This includes planning profits and having an exit strategy in case a trade does not go as expected.

Developing a trading plan and taking a measured approach will lessen the chance of incurring losses due to liquidation. Having a plan lessens the likelihood of making impulsive decisions when your funds are at stake in the market. A strategy can help prevent emotions, such as greed or fear, from guiding your actions by removing the temptation to retain a losing position for too long or exit a profitable one too soon.

The Calculator tool on Binance Futures allows you to visualize potential trades by experimenting with different parameters, including leverage, entry price, exit price, and more. With this tool, traders can calculate their expected profits or potential losses ahead of time, enabling them to follow a more planned approach rather than being driven by market movements.

2. Secure your trading positions.

Despite taking necessary precautions, the markets often move in unintended directions. In such cases, it is vital to have an exit strategy that prevents your position from getting liquidated if the markets move in the opposite direction to your trade.

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One of the most common and effective ways to secure your trading positions is to use a stop-loss order. A stop-loss order is a conditional order executed at a specified price after a given stop price has been reached. Once the stop price is reached, it will buy or sell at the market/limit price, depending on your order parameters.

A stop-loss order limits an investor’s loss on a position that makes an unfavorable move. For instance, you set up a 20% stop loss from your entry price. Assume your entry order was executed at $40,000. The stop-loss order will be triggered when the price drops -20% from $40,000.

By setting a stop-loss order, you can exit a losing position earlier and avoid getting liquidated).

3. Avoid accumulating more contracts in a losing position.

Let’s consider this scenario. Assume you have a wallet balance of 500 USDT. You entered a long BTCUSDT position worth 1,000 USDT with 20x leverage at $50,000. In this example, your liquidation price will be $25,100.

Now assume that BTCUSDT’s price falls 10% to $45,000. You decided to add on to your losing position and entered another long BTCUSDT position worth 1000 USDT with 20x leverage at $45,000. Adjusting to your newest position, the liquidation price is now $35,857.

Adding more contracts to a losing position will increase your liquidation price of the entire position. This means you are more likely to get liquidated if the price continues to fall.

Instead of adding more contracts to a losing position, reducing your position size or closing it entirely is advisable. This way, you can lower your liquidation price and preserve your margin balance.

4. Use leverage responsibly

Leverage is a double-edged sword that can amplify both your profits and losses. The higher the leverage you use, the lower the margin you need to open a position and the higher the liquidation risk you face.

Using a high leverage can be tempting, as it allows you to trade with a larger position size than your available capital. However, it also means you are more exposed to price fluctuations and market volatility. A small adverse price movement can trigger liquidation and eliminate your entire margin balance.

Therefore, using leverage responsibly and adjusting it according to your risk appetite and trading strategy is important. Lower leverage can give you more room for error and allow you to withstand larger price swings without getting liquidated.

Binance Futures offers a range of leverage options from 1x to 125x for different futures contracts. You can choose the leverage level that suits your trading style and risk tolerance.

5. Monitor your margin ratio and the liquidation price

Another way to avoid liquidation is to regularly monitor your margin ratio and liquidation price. These metrics can help you assess how close you are to liquidation and whether you need to take any actions to prevent it.

Your margin ratio and liquidation price are found on the Binance Futures trading interface. The margin ratio is displayed as a percentage next to your wallet balance, while the liquidation price is below your open positions.

You can also use the Binance Futures Liquidation Price Calculator to calculate how increasing your wallet balance or reducing your position size will affect your liquidation price.

If your margin ratio is too high or your liquidation price is too close to the current market price, you may consider adding more funds to your account or closing some of your positions. This way, you can lower your margin ratio and increase the distance between your liquidation and market prices.

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FAQ 

What is Binance Futures?

Binance Futures is a platform that allows traders to speculate on the future price movements of various cryptocurrencies using leverage.

What is leverage?

Leverage is a tool that enables traders to amplify their profits by borrowing funds from the platform.

What is liquidation?

Liquidation is the forced closure of a trader’s leveraged positions when their margin balance falls below the maintenance margin requirement.

What is the maintenance margin requirement?

The maintenance margin requirement is the minimum amount of funds that a trader must have in their account to keep their positions open.

What is the margin balance?

The margin balance is the amount of funds a trader has in their futures account, which can be used as collateral for their leveraged positions. The margin balance consists of the initial margin and the unrealized profit or loss.

What is the initial margin?

The initial margin is the number of funds a trader deposits or transfers to their futures account to open a leveraged position.

What is the unrealized profit or loss?

The unrealized profit or loss is the difference between the entry and market prices of the trader’s open positions.

What is the margin ratio?

The margin ratio is a metric that measures how close a trader is to liquidation. The margin ratio is calculated by dividing the maintenance margin by the margin balance.

What is the liquidation price?

The liquidation price is when a trader’s positions will be liquidated if they do not add more funds to their account or reduce their position size.

How can I avoid liquidation?

You can avoid liquidation by following these strategies:
• Develop a trading plan and use the Calculator tool on Binance Futures to visualize potential trades
• Secure your trading positions with stop-loss orders to limit your losses
• Avoid accumulating more contracts in a losing position and reduce your position size or close your position entirely
• Use leverage responsibly and adjust it according to your risk appetite and trading strategy
• Monitor your margin ratio and liquidation price regularly and use the Binance Futures Liquidation Price Calculator to calculate how to lower your liquidation price

How can I use the Calculator tool on Binance Futures?

You can use the Calculator tool on Binance Futures by clicking on the calculator icon on the top right corner of the trading interface. You can enter different parameters, such as leverage, entry price, exit price, and more, to calculate your expected profits or potential losses ahead of time.

How can I use the Binance Futures Liquidation Price Calculator?

You can use the Binance Futures Liquidation Price Calculator by clicking the calculator icon next to your open positions. You can enter different values, such as wallet balance or position size, to calculate how they affect your liquidation price.

Conclusion

Liquidation is a risk that every futures trader should be aware of and avoid. Liquidation can result in losing your entire margin balance and paying a liquidation fee to the platform.

To avoid liquidation, you should follow these strategies:

• Develop a trading plan

• Secure your trading positions

• Avoid accumulating more contracts in a losing position

• Use leverage responsibly

• Monitor your margin ratio and the liquidation price

Applying these strategies can minimize liquidation risk and protect your capital when trading on Binance Futures.

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