What exactly does liquidation of a perpetual contract mean?

Detailed explanation of perpetual contract liquidation

Definition of liquidation

Perpetual contract liquidation It means that when the margin loss of a trader's position exceeds the maintenance margin ratio specified by the trading platform, the trading platform system will forcefully liquidate all open positions, causing the trader to lose all principal.

Causes of liquidation

Perpetual contract liquidation is usually caused by the following reasons:

• Significant market fluctuations: When the market fluctuates violently, the contract price may rise or fall significantly, causing traders' position losses to expand rapidly.
• Excessive Leverage: Perpetual contract trading generally allows for high leverage, meaning traders can trade larger contracts with a small amount of principal. However, high leverage can also magnify risks, and when prices go unfavorably, losses can also be magnified.
• Improper position management: If a trader holds too many positions or the position ratio is unbalanced, it may be easier to liquidate the position when the market fluctuates.
• Market manipulation: In extreme cases, market manipulation may cause significant fluctuations in contract prices, triggering liquidation.

Consequences of liquidation

Perpetual contract liquidation will result in the following consequences:

• Loss of principal: Traders will lose their entire investment.
• Margin Call: In some cases, the trading platform may require traders to add margin to avoid liquidation. If the trader fails to meet the requirements, it may also lead to liquidation.
• Damaged Reputation: Liquidation may damage a trader’s reputation, making it difficult to obtain future trading opportunities.

How to avoid liquidation

In order to avoid liquidation of perpetual contracts, traders can take the following measures:

• Use leverage with caution: Choose a leverage multiple that suits your risk tolerance.
• Manage positions: Avoid holding too many positions or concentrating them in a single direction.
• Stop Loss Order: Set a stop loss order to limit losses.
• Monitor the market in real time: Pay close attention to market dynamics and adjust positions in a timely manner.
• Strengthen risk awareness: Keep in mind the high risk nature of perpetual contract trading and take appropriate measures to manage risks.

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