Testing mechanics of liquidation in margin trade

The world of cryptocurrency trading has witnessed significant growth in recent years, and new investors have joined the market on a daily basis. However, this rapid growth also has a sincere risk. One of the most important problems of traders is margin shop, which includes borrowing from brokerage to buy or sell cryptocurrencies at a higher price. Market trade can be unstable and involves a significant risk, including the possibility of liquidation.

What is liquidation?

The liquidation refers to the procedure in which the merchant’s account is closed due to excessive losses to reduce potential losses for all pages involved. This is often triggered when the merchant does not meet the margins’ requirements or exceeds the predetermined limits of the loss. In the context of the crypto -valute trading, the liquidation usually occurs when the state of the dealer’s account falls below a particular threshold.

Liquidation mechanics in margin trade

Liquidation in margin trade includes several key mechanics:

• Market Requests : Brokers determine marine requirements to make sure that traders have sufficient funds to cover potential losses. For example, if the merchant has a 3: 1 margin request and buy Bitcoine worth $ 100 per by USD, he must pay $ 150 on his account.

• Loss limits

  : Some brokers impose restrictions on traders. If the account of the dealer drops below a particular restriction, liquidation will take place.

• White accounts : dealers’ accounts are regularly checked to determine whether they have fulfilled marginal requirements or have exceeded the loss limit. When this happens, liquidation is triggered.

• Liquidation thresholds : Brokers set certain thresholds for account balance that cause liquidation. These thresholds may differ depending on the broker and the trade strategy.

How the liquidation works

Here’s an example of how liquidation in margin trade works:

• The merchant buys bitcoins worth $ 100 per USD 50 per unit.

• The merchant will weaken $ 150 on his account, which fulfills the Marž 3: 1 request.

• However, the merchant exceeds the limit of loss by buying another Bitcoin unit for $ 50 (total: $ 200).

• The broker inspects the account balance and determines that it has fallen below a particular threshold ($ 350).

• Liquidation is initiated and the merchant’s account is closed.

Consequences of liquidation

Liquidation in margin trade may have significant consequences for traders:

• Account closure : account liquidation usually consists of closing all open items and transferring funds to a holding account or cash.

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• fees and fees : mediation fees, interest rates and other fees may be applied after the account closure.

Best Risk Management Practice

To diminish the risk of liquidation in margin trade:

• Set real expectations : Realize that margin trade involves a significant risk, including the possibility of liquidation.

• MONIER ACCOUNT CONDITION : Check your account regularly to make sure they meet the limit requirements and loss restrictions.

• Keep the right margin : Make sure that sufficient means are deposited to cover potential losses.

• Diversify investments : spreading investment in many assets to reduce exposure to one property.

• Use the stop order : stop settings to limit potential losses if market conditions change.

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The liquidation of margin trade is a key aspect of trading cryptocurrencies in which traders have to balance the risk of profit with the need to effectively manage their accounts.