Trade Responsibly and Prevent Liquidations on CoinCatch

Welcome to CoinCatch - the best crypto exchange worldwide for Futures trading!

 

CoinCatch encourages its users to trade responsibly, acknowledging that while trading can be engaging and enjoyable, it should be treated as a serious endeavor to avoid potential financial and emotional distress. Trading derivatives carries inherent risks, especially considering the high levels of price volatility often associated with cryptocurrencies and other digital assets.

 

Crypto liquidation can be a challenging situation that investors who use leverage often dislike. Don't miss this tutorial, which will teach you how liquidation works and provide tips to avoid it.

 

What is crypto liquidation?

In the crypto world, liquidation occurs when traders can't meet the margin requirements for their leveraged position, meaning they don't have enough funds to keep the trade open. Margin requirements become underfunded when the price of the underlying asset suddenly drops.

 

When this happens, the exchange automatically closes the position, resulting in the investor losing their funds. The extent of the loss depends on the initial margin and how much the price drops. In some cases, it can even lead to a complete loss of investment.

 

Liquidations can be partial or total. Here are some examples:

• Partial liquidation: Closing part of the position early to reduce the size and leverage used by the trader.
• Total liquidation: Closing the position when most of the trader's initial margin has been used up.

 

How to calculate the liquidation price on CoinCatch?

CoinCatch supports both isolated margin mode and cross margin mode, each with distinct calculation methods employed.

 

1. Isolated margin mode

 

A. How forced liquidations or reductions trigger:

As mentioned earlier, forced reduction or liquidation will occur if your account lacks sufficient funds to meet the maintenance margin requirement, or if the actual margin rate of your position is equal to or lower than the maintenance margin rate (MMR).

Position's margin rate = (margin + unrealized PnL) ÷ position (USDT) - taker fee

Position = number of positions × average position price

Note: The maintenance margin rate or MMR includes the clearance fee rate or taker fee for all calculations.

 

B. How to calculate forced liquidations or reductions:

For long positions:

(Average entry price × position size - initial margin × the latest price of the underlying asset under the current margin) ÷ (1 - MMR)

For short positions:

(Average entry price × position size + initial margin × the latest price of the underlying asset under the current margin) ÷ (1 + MMR)

2. Cross-margin mode

 

A. How forced liquidations or reductions trigger:

When the margin ratio of the cross-margin position is less than 1, a forced reduction or liquidation is triggered. The margin ratio measures the risk of an investor's position.

Margin ratio = (total maintenance margin value in cross-margin account + maintenance margin for all commissioned orders both in cross-margin and isolated account) ÷ (total assets + total unrealized PnL)

Maintenance margin = position value × MMR.

Note: The maintenance margin rate or MMR includes the clearance fee rate or taker fee for all calculations.

Forced reduction or liquidation process: When the conditions are triggered, and two-way orders and one-way orders coexist, all two-way orders will be at risk of forced reduction or liquidation first.

 

B. How to calculate forced liquidations or reductions:

If the net position is long:

If the net position is short:

Net position value = the latest price of the pair × the net position's absolute volume ÷ the latest price of the margin currency

W = the net position value of the pair / the sum of the net position value of all pairs

Index = the index price of the current margin currency

 

3. When futures contracts experience a forced reduction, the following actions take place:

• Step 1: The system closes any active orders associated with the contract.
• Step 2: The system assesses the risk tier of the position based on the Maintenance Margin Rate (MMR). If the position is in a tier higher than 2, it is forcibly reduced to reach tier 1 by reducing two tiers at once. If the position is already in tier 2, it is automatically reduced to tier 1.
• Step 3: If the position is already in tier 1 and the forced reduction continues, the position is liquidated.

 

4. Calculate beforehand to enjoy profitable trading

 

CoinCatch provides a handy calculator that enables you to calculate the liquidation price and Profit and Loss (PnL) before entering a position, along with the closing price in advance.

 

How to avoid liquidation?

It is impossible to completely eliminate the risk of liquidation. The higher the leverage you use, the greater the risk. However, there are different strategies you can use to lower the risk and minimize potential losses.

 

1. Increase margin

Investors can prevent margin calls by making sure they have enough money in their account to cover the required maintenance margin. But if investors are in danger of being forced to reduce or liquidate their positions, they can respond to the margin call by depositing the necessary funds into their margin account.

 

2. Set Stop Loss strategy

Investors can set a specific price to automatically close the position in order to minimize the loss.

 

3. Reduce/close positions

Investors can retrieve an amount of principal to avoid greater losses by reducing or closing positions.

 

It is crucial, especially for beginners, to utilize low leverage in order to decrease the risk associated with their positions. It is advisable to develop your own investment principles and trading strategy, while continuously learning to enhance your skills and establish a solid foundation for future investments.