Teresa Hoy 
Liquidation of positions on Binance Futures is a process designed to minimize the risks associated with trading cryptocurrency futures, especially when leverage is used. Trading futures allows traders to open positions that significantly exceed their initial capital thanks to leverage. However, this also increases risks, including the risk of position liquidation if the market moves against the trader.
What is Liquidation?
Liquidation on Binance Futures occurs when a trader’s losing position reaches a level at which it is automatically closed to prevent further losses. This protects both the trader from a negative balance and the exchange from losses.
How Does Liquidation Work?
Liquidation is initiated when a trader’s margin no longer meets the requirements for maintaining an open position. This can happen due to a significant market move against the trader’s current position, quickly depleting the margin. In such cases, Binance automatically closes the position at the current market price to minimize losses.
Insurance Fund and Socialized Losses
To deal with situations where losses exceed the funds in a trader’s account, Binance uses an insurance fund and a system of socialized losses.
The insurance fund is collected from liquidation commissions and is used to cover losses in cases where the trader’s funds are insufficient. The system of socialized losses distributes losses among profitable traders if the funds in the insurance fund are not enough (Binance).
Ways to Prevent Liquidation
Traders can take various measures to avoid liquidation, including setting stop-loss orders, reducing the size of positions, or adding margin to their position. It is also recommended to keep the margin ratio below 80% to reduce the likelihood of liquidation (Binance).
Conclusion
Liquidation of positions on Binance Futures is a critically important mechanism that protects both traders and the exchange from excessive losses.
Understanding the principles of liquidation, as well as the ability to manage risks and use protective tools such as stop-loss orders, will help traders avoid unwanted liquidation and protect their capital.
