The following are best practices that a trader should follow when trading on derivative contracts.
1. Trade with lower leverage (for new traders)
Cryptocurrencies are some assets with the highest volatility. To reduce the chances of being liquidated, you should always set a risk to reward ratio and be very careful with leverage trading. Please always keep your potential risk for losses to levels you can manage.
With high leverage, even minute moves in the price of an asset can have a large effect on the PNL of your position.
2. Always set a stop loss
A stop-loss function is a conditional order that is automatically executed when the price reaches a certain level. You can set stop loss at a price where you want to buy or sell your contract.
- Suppose you opened a long position at $40,000 for BTCUSDT-P and you have determined that you can risk 20% of your position by setting up a stop-loss at 20% below your entry price.
- The stop-loss will be automatically triggered once the price drops 20%. And your open position will be closed, saving you from further loss and hence liquidation.
3. Remember to add funds to your maintenance margin
To do this, you will need to closely watch your open position.
If your margin ratio reaches 100% in negative PNL, your position will automatically close, and you will be liquidated.
If you have opened a position and the price has dropped significantly after you opened the position, your maintenance margin will change to a potentially riskier position. If you don’t increase your margin balance, you will be at a higher risk of being liquidated.
It is wise to add funds to your account during significant price movements.
You can do this as many times as you want. But you will need to be careful to not be stuck in a trade.