In Financial Marekt, we can define risk as the loss in capital that people may suffer when trading or investing. Therefore, risk is not an actual loss, but the possibility of causing a loss. The risks of trading Cryptocurrencies are mainly related to their volatility. They are high-risk and speculative, and the risks must be understood before starting trading.
Existing risks
1. Risk of price volatility
Digital currency derivatives as a special investment value of the goods, its price is affected by a variety of factors, price fluctuations, investors in the actual operation is difficult to fully grasp, so there is the possibility of investment mistakes, if not effectively control the risk, it may suffer greater losses, investors must bear all the losses caused by this alone.
2. Trading risk
Investors need to understand that derivatives trading has the characteristics of high leverage, which may lead to rapid profits or losses. If the direction of the transaction is opposite to the fluctuation of the market, it will cause a large loss. According to the degree of loss, investors need to add digital currency margin or reduce positioning, otherwise their positions may be forced to position squaring, and investors must bear all the losses caused.
In the trading system of the exchange, the limit price submitted by investors is irrevocable after a single transaction, and investors must accept the risks that may be brought by this method.
3. Policy and regulatory risks
Digital asset derivatives trading may face policy and regulatory risks in certain jurisdictions. Investors need to make prudent judgments on the premise of understanding the policy and regulatory background of the trading region before trading.
4. Other possible risks
When users use high leverage, it will bring greater risks to the users themselves and the market. Therefore, in order to maintain market stability, the platform will monitor the positions of users who use high leverage. When the platform judges that the user's positions may be When the market stability is greatly affected, corresponding treatment measures will be taken, including but not limited to communication, revealing risks, forced position reduction, forced position squaring, etc.
Cryptocurrency has high volatility, and even slight price movements may lead to forced position squaring and loss in capital. Therefore, a reasonable strategy must be formulated to minimize the risk of strong leveling. Next, we will introduce you to some tools and strategies to avoid the risk of strong leveling in Cryptocurrency contract trading.
Strategies to avoid the risk of mandatory position squaring
1. Develop a trading plan
The most effective measure to reduce the risk of strong leveling is to make a trading plan in advance. The trading plan should not only consider gains, but also include exit strategies when the trade develops unfavorably. Having a trading plan and exercising caution can help reduce the chance of losing money due to forced position squaring.
Having a trading plan can effectively prevent investors from making impulsive decisions when faced with the risk of losing money. Trading strategies can prevent traders from being carried away by emotions such as greed or fear, and can't bear to abandon losing positions, or prematurely position squaring profitable positions.
2. Set a stop loss
Exit strategies are especially important in times of adverse market movements to avoid forced position squaring. Traders often pay attention to the timing of exiting a trade, but these timings can easily be overlooked. In this case, stop loss orders can be placed to make exit plans more efficient and reduce potential losses.
A stop-loss order selects a specific price in advance, and the asset is automatically sold when the price reaches a predetermined level. Although stop-loss orders are very effective for avoiding the risk of strong leveling , they are not foolproof.
3. Focus on margin ratio
The margin ratio is an important factor affecting the mandatory position squaring of contract transactions. The margin ratio is calculated as Maintenance Margin/Margin Balance. Maintenance Margin is the minimum amount to maintain a trading position on the account; Margin Balance is the amount of funds available on the account.
Divide the Maintenance Margin by the Margin Balance to get the Margin Ratio. When the Margin Balance falls below the Maintenance Margin Rate, the trading platform automatically forces position squaring to prevent greater losses. Therefore, traders need to pay close attention to the margin ratio to avoid forced position squaring.
When the price falls, the trader needs to ensure that the account has sufficient margin balance to keep the margin ratio higher than the Maintenance Margin Rate. The more margin balance, the lower the strong leveling price.
4. Adopt a risk management strategy
Effective risk management is crucial in contract trading, especially when it comes to volatile assets like Cryptocurrency. It is an important principle of risk management to limit risk exposure within a reasonable range in the face of any transaction. Generally, the investment amount of a transaction should not exceed 1-2% of the trading account balance.
For example, if you want to trade contracts and you have an account balance worth $10,000, it is best not to invest more than $100 to $200 per trade. Even if the trade fails, you will only lose a small portion of your account balance.
Once you have officially started trading, don't be too hasty. At the beginning, it is best to use 2 to 5 times leverage to avoid trading multiple contracts at the same time.
Investing is unlikely to be smooth sailing, so avoid taking large positions as much as possible, otherwise one or two failed trades could result in significant losses. Don't put yourself under the huge pressure of managing your forehead inch, but take it step by step and figure out the trading method that works for you.
5. Avoid Compounding Losses
A very important point in contract trading is to avoid adding positions in losing trades. If the contract you invest in suffers a depreciation, you should not continue to add positions.
Expanding positions on losing positions will reduce the price of the settlement and increase the chance of the settlement. Traders should pay attention to risk management and sell losing positions to stop losses in time, rather than hoping to reduce losses by leveling down or buying more contracts. It is very important to have a trading plan and follow it strictly to avoid huge losses caused by impulsive decisions.
Step 6 Don't overtrade
Any investor or anyone wishing to trade futures must be careful to ensure they do not overtrade. Overtrading occurs when you have too many unpositioned squaring positions or risk a disproportionate amount of capital in a single trade, thereby exposing your entire portfolio to undue risk . To avoid overtrading, it is essential to adhere to the trading plan and strictly adhere to the pre-planned strategy.
Most new traders are notorious for overtrading, often due to an inability to control emotions such as greed, fear, and excitement.
7. Invest only what you can afford to lose
There is one golden investment rule you should always keep in mind: Never invest money you cannot afford to lose.
A common feature when dealing with crypto futures is volatility. It is very easy to lose money in a highly volatile market. Prices can change drastically at any time. Investing more than you are willing to lose can get you into trouble. Therefore, you should only trade Cryptocurrency futures with your excess savings to separate emotions from your investment decisions.
A good trader must be willing to control his emotions and operate in a systematic and calculated way. Also, make sure you have established a robust risk and money management strategy to protect your money at all times. Remember to always take advantage of the rule of thumb of risking 1-2% of your account balance per trade and always be prepared to take losses in order to better accept them as part of the futures trading process.
Summary
Trading futures can be highly profitable, especially with the high leverage it offers. Nonetheless, it is possible to lose your entire investment if it is not clear how it works and how to minimize the associated risks.
If you are looking for the opportunity to make bigger profits while taking higher risks, crypto futures are undoubtedly a financial instrument that is very suitable for investment. Good capital and risk management can help you maximize returns and reduce losses incurred from trading Cryptocurrency futures.
About X Exchange
About X ExchangeX Exchange is a leading Web2.5 intelligent crypto asset trading platform. At X Exchange, we are committed to providing users with a more secure, efficient and convenient crypto asset trading experience through intelligent technology and Web2.5.
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