CoinEx | What Causes 90% of Forced Liquidations among Newbie Futures Traders?
As we can see, prices of cryptos like Bitcoin and Ethereum have rebounded, yet unfortunately, due to the past slumps, the top ten cryptos remain sluggish. As of the writing of this article, Bitcoin is still hovering at around $38,000.
Despite the recent gloomy crypto market, the futures turnover of the crypto derivatives market has been soaring, and it is thus fair to say that futures trading has improved the utilization of funds to some extent.
Futures, the darling of crypto investors, comes with huge risks, leading to frequent forced liquidations. According to bcoin’s data concerning liquidations of futures on the entire network, the amount of liquidation exceeded US$500 million on February 24, and over 40,000 people liquidated their positions in the last 24 hours. These staggering figures get people thinking: is futures trading doomed to forced liquidation? Of course not. Even a green hand could avoid liquidation or at least relieve the losses as long as he knows the common causes.
So what kind of behaviors could cause liquidation in futures?
1. An all-or-nothing bet. Newcomers to futures usually go all-in on the spur of the moment, but end up with forced liquidation. Therefore, newbie investors should control positions and make rational investments.
2. No Take-Profit & Stop-Loss measures taken. This is a common cause behind liquidation, and it has something to do with investors’ mentality: those who suffer losses want to get their money back, while those who make a profit want to earn more. Both of them could easily have their positions liquidated under the volatile market. So newcomers need to stay aware of where to take profits and where to stop losses.
In fact, many exchanges have the feature of take-profit and stop-loss to help users control risks. CoinEx, for example, places the TP/SL function in a conspicuous place on the Futures page. The user can easily set TP/SL after opening a position. How market orders are triggered and the estimated PNL are described so clearly that even a newbie can get started in no time.
3. Frequent trades. This is another problem commonly seen among newbies who can’t stand the short-term fluctuations and trade frequently. However, such actions could make your market predictions less error-tolerant, leading to forced liquidation of even some small positions.
4. Bargain hunting in a hurry. This prevails among the novices who used to make a profit. Unfortunately, acting like a know-all, these investors merely base their judgment on past market performance instead of the current conditions. Once they get trapped, forced liquidation is inevitable.
5. Little knowledge about the market dynamics and false predictions. Confused about market fluctuations, investors may blindly follow the crowd, increasing positions against the downward trend. Without enough knowledge about the market, newbies usually rush to open a position, which could be risky. Some may be reluctant to stop losses and, instead, keep increasing positions till forced liquidation. With overconfidence in market predictions, investors trade against the downward trend in haste before the market recovers, suffering forced liquidation eventually.
6. Holding a position overnight. In this case, positions are not closed by the end of the day, which usually leads to liquidation. Since cryptos are traded around the clock, holding positions overnight leaves you unaware of market dynamics and thus prone to losses of liquidation.
The above six points are common causes behind forced liquidation in futures trading and should be avoided. Inexperienced futures investors should also equip themselves with know-how in the repository and tools provided by exchanges to identify liquidation risks. For example, CoinEx Exchange warns investors of Bankruptcy Risk on the Futures page, and also provides a futures trading repository to help users make well-informed investment decisions: https://support.coinex.com/hc/en-us/categories/360001448453-Futures-Contract