Make a plan
The best way to minimize your liquidation risk is to plan your trades well before opening them. Having a strategy and calculated approach will reduce your chances of unnecessary losses (read this lesson to better understand liquidation in crypto).
You may use the Calculator function on the Huobi Futures interface and test different leverages, entry prices, equity and open amounts, and adjust the estimated liquidation price to suit your trading preferences. Make sure it is not too close to the current price, so the market has ‘space’ to move without placing you at risk of liquidation.
Even if you take the necessary precautions, the market doesn’t always move in the direction you have planned for it. This is why you should use stop-loss to limit and control possible losses. A stop-loss order is a conditional order that is automatically executed at a specified price once the market price matches it.
You can set a stop-loss order to buy or sell your position to limit losses if the market sees an unfavorable move. You can, for example, set a sell stop-loss of 5% from your entry price. If your entry price is executed at 1,000 USD, the stop-loss order will be triggered when the price drops by 5% to 950 USD. Stop-loss lets you exit a losing position earlier and as such, avoid liquidation.
Think twice before adding to losing positions
You should also know that adding to new positions increases the liquidation price of your entire position.
Imagine you have an equity of 1,000 USD on your account. You enter a long BTC-USD position worth 2,000 USD, with 10x leverage at 60,000 USD. As seen in the picture below, your estimated liquidation price is 29,921.3 USD.
Now, imagine the BTC-USD price falls 10% to 54,000 USD. You see this as a good opportunity to add to your long position and enter a long BTC-USD position worth 2,000 USD, with 10% leverage at 54,000 USD. With this new position, the estimated liquidation price increases to 44,280 USD. So not only is the price lower in this new scenario, the liquidation price is also higher. Therefore, the price now has less space to move before liquidation occurs.
Keep an eye on margin ratio
Finally, it is recommended you pay close attention to and monitor the changes in margin ratio to avoid liquidation. You can observe this on the trading interface in the Asset Zone.
The lower the margin ratio, the higher the liquidation risk — when the margin ratio falls to 0, forced liquidation will be triggered. Therefore, do ensure you have enough equity on your futures account. The higher your account equity, the lower the liquidation price.
New to Huobi? Register for a Huobi account and receive a ‘Welcome Bonus’ to help you start your investment journey! If you’re an existing user, check out Huobi Earn, where you can start earning interest from your idle cryptocurrencies!