Understanding the risk of liquidation in hedging trade
The world of cryptocurrencies has experienced significant growth and volatility over the years, making it a profitable market for merchants. However, this growth also causes increased risk, especially in the margin trade. One of the most significant risks of hedge commerce is liquidation.
What is liquidation?
Liquidation occurs when the trader’s cryptocurrency position was below a certain threshold, which caused the exhaustion or reduction of their account balance. This can happen for several reasons, including:
- Unrealistic expectations: overloading and taking over too much risk, leading to a sudden fall in the price of cryptocurrency.
- Volatility of price: a sudden and drastic drop in price, which makes it difficult for merchants to restore their losses.
- Market Manipulation: Use false or manipulated orders to reduce prices and increase losses.
Risks related to hedging trade
Cover trade includes lending from broker to cryptocurrencies. This increases the potential risk of liquidation as the trader’s account balance is now bound to the value of multiple positions. Some risks associated with hedging trade include:
* Decreased profit!
* Increased leverage : The use of a higher leverage increases the potential of significant losses as the low price movement can result in significant profits or losses.
* Liquidation Risks : If the trader’s account balance falls below a certain threshold, their position can be liquidated, which results in the loss of the total amount.
Risks of liquidation
When the Margin dealer’s position is eliminated, they risk losing not only their initial investment but also more funds borrowed from the broker. This can result in significant financial losses that can be difficult to restore.
Some specific risks related to liquidation are as follows:
Losses **: The dealer is the most silent concern for the loss of total account balance as well as the additional funds borrowed.
* Financial Staff : Liquidation positions can cause a significant burden on the merchant’s financial resources, making it difficult to cover livelihoods or other financial obligations.
* Regulatory Risks : In some cases, liquidation may trigger regulatory measures or sanctions, such as fines or suspension of trading accounts.
Risks to alleviate
While there is no way to completely eliminate the risk of liquidation in hedging trade, there are steps that merchants can take to alleviate these risks:
* Diversified : Distribution of investments can help reduce overall risk exposure through multiple cryptocurrencies and asset classes.
* Use Stop-Loss Orders : Setting the Stop-Loss Order can limit losses if the price of cryptocurrency leads to a trader position.
* Monitor market conditions : Taking into account market trends and emotions can help merchants adjust strategies to minimize risks.
Conclusion
The Margin trade is a high-risk, high-reward activity that requires careful consideration and planning. Although a certain level of risk lies in the market, it is essential for merchants to understand the risks of liquidation and take steps to alleviate it. By diversifying investments, using Stop-Loss orders and monitoring market conditions, merchants can reduce their exposure to these risks.
More sources
* Bitcoin Commercial Guide : A comprehensive guide to buying and selling bitcoin, including risk alleviation.
* Margin Trade 101
: Introduction to Margin Trade, which covers the basics of leverage, position size and liquidity.