What is liquidation on futures?

Futures trading in the world of cryptocurrencies is rapidly gaining popularity due to the ability to profit from both rising and falling markets. However, along with potential benefits, it carries significant risks, especially for beginners. One of the most critical risks is liquidation—a process whose understanding is key to effective capital management and minimizing financial losses.

What are futures in cryptocurrency?

A futures contract is an agreement to buy or sell an asset in the future at a predetermined price. In cryptocurrency trading, traders can open:

• Long positions —anticipating a price increase;
• Short positions —anticipating a price decrease.

Another important tool is leverage, which allows operating with larger amounts than the actual deposit, simultaneously increasing both potential profit and risks.

Types of margin

The correct choice of margin type determines the level of risk and potential liquidation. There are two main types of margin: isolated and cross margin.

Margin is the collateral that a trader deposits to open a position. It acts as a guarantee that the investor can cover their losses if the market moves against their forecast. Depending on the settings, isolated or cross margin can be used.

How to choose between isolated and cross margin?

Beginners are better off using isolated margin to limit potential losses. However, experienced traders may choose cross margin to hedge risks or work with complex trading strategies.

Definition of liquidation

Liquidation in futures trading is the forced closure of a position by the exchange when the trader's balance cannot cover the losses. This happens when the asset price moves against the open position, reducing the margin to a critical level.

How does the liquidation mechanism work?

Example:

• You open a position with 10x leverage.
• If the market moves against you, your losses increase 10 times faster.
• As soon as the margin decreases to the minimum allowable level, the exchange liquidates the position to avoid even greater losses.

There is partial liquidation—part of the position is closed to reduce risk, and full liquidation, where the entire position is closed.

Factors affecting liquidation risk:

1. High volatility of the cryptocurrency market.
2. Use of high leverage.
3. Insufficient margin level to cover losses.

How to avoid liquidation?

• Use Stop-Loss and Take-Profit orders to automatically close positions.
• Follow risk management principles, such as not risking more than 1-2% of capital in a single trade.

• Regularly monitor the market and use technical analysis for informed decisions.

  

Why is liquidation an important signal for a trader?

It is an opportunity to analyze your mistakes and improve trading strategies. Additionally, liquidation teaches discipline and emotional control, which are important for successful trading.

Conclusion

Liquidation is an important mechanism in futures trading that helps control risks for both traders and exchanges. To avoid significant losses, it is necessary to understand how this process works and follow basic risk management rules. Remember: knowledge and discipline are the keys to success in futures trading.

Tips from Kursoff:

Do not use maximum leverage

More is not always better. Using excessively high leverage sharply increases the risk of liquidation. Even experienced traders often work with moderate leverage (2x–5x) to reduce risks.

Do not risk all funds in one trade

Capital allocation (diversification) reduces the likelihood of large losses. It is not advisable to invest more than 1-2% of the total deposit in a single position.

Plan your trade before opening it

Determine entry and exit points, risk level, and potential profit before clicking "Buy" or "Sell." This helps avoid emotional decisions during trading.

Do not trade under emotional influence

Haste, fear of missing out (FOMO), or the desire to "recover" after a loss often lead to mistakes. Keep a cool head and follow your strategy.

Learn to analyze your mistakes

Keep a trading journal where you record why you opened a position, what went wrong, and how losses could have been avoided. This will help improve your strategies.

Monitor market liquidity

Low-liquidity assets can experience strong price fluctuations due to large orders, increasing the risk of liquidation.

Regularly update your knowledge

The cryptocurrency market changes rapidly. Learn new strategies, analyze trends, and continuously improve your skills.