How to Avoid Liquidation in Crypto Futures Trading
Liquidation is the nightmare of every leveraged trader. It is the moment your position is forcefully closed because losses exceeded your margin. The good news: liquidation is preventable with disciplined risk management.
The Cost of Liquidation
In 2024 alone, over $25B worth of crypto positions were liquidated across major exchanges. Most of these were retail traders who skipped proper position sizing.
Understanding Liquidation
When you open a leveraged position, you post collateral called margin. If price moves against you and unrealized losses approach your margin, the exchange closes your position to prevent debt.
Liquidation Price Formula (Long)
Liq Price = Entry * (1 - 1/Leverage + MMR)
Example with 10x leverage:
Entry: $50,000 | Liq: $50,000 * (1 - 0.1 + 0.005) = $45,250
~9.5% move against you = liquidation
7 Strategies to Avoid Liquidation
1. Use Lower Leverage
The #1 cause of liquidation is excessive leverage. 100x leverage means a 1% move liquidates you. Stick to 5-10x for swing trades and max 20x for scalping.
2. Always Use Stop Loss
Set your Stop Loss above your liquidation price. A good rule is keeping it 20-30% away from liquidation to account for slippage and wicks.
3. Keep Reserve Margin
Never use 100% of your balance as margin. Keep 30-50% in reserve so you can add margin during drawdowns.
4. Use Isolated Margin
Isolated margin limits loss to the margin assigned to that position. Cross margin risks your entire account.
5. Calculate Position Size Properly
Use the 1-2% rule: never risk more than 1-2% of your account on a single trade.
6. Avoid High-Volatility Events
FOMC, CPI releases, and breaking news can cause 5-10% wicks in seconds. Either reduce size or stay out.
7. Monitor Your Positions
Set price alerts near Stop Loss. If you cannot monitor, lower leverage further or reduce position size.
The Liquidation Cascade Effect
Liquidations often trigger more liquidations. Large forced sells push price down and can wipe out nearby positions, creating sharp wicks.
Pro Tip: Track Liquidation Levels
Many traders use liquidation heatmaps (Coinglass, Hyblock) to see where clusters sit. Price often hunts these levels for liquidity.
Calculate Your Liquidation Price
Use our free calculator to find your liquidation price before entering any trade:
Open Liquidation Calculator