7 Trading Techniques to Avoid Liquidation.
Every trader should agree that liquidity is king. Opportunities may present themselves, but absence of liquidity to take advantage of the opportunity only makes it a lost one. That is why the most important skill a trader should have surrounds the point of this article; Liquidity Protection.
What is liquidation.
In trading, liquidation can be described as a scenario whereby a traders ability to participate in the market is gone. It simply means that a trader no longer has the financial capacity to trade with. Safe to say that at liquidation, a trader has lost all their capital, and “blown account”.
Causes of liquidation.
There are several reasons why, and scenarios that could lead traders to becoming illiquid. And as every traders’ worst enemy, liquidation is a state that no trader wants to find themselves in.
Most common reason for liquidation is believed to be bad trades. But reasons such as erroneous personal conviction, inexperience, and lack of trading ethics are more responsible for liquidating traders out of the market.
How to stay safe from liquidation while trading.
- Accept bad trades as normal:
First step is to realize that it is impossible to not make wrong trades. In fact, wrong trades are often times the right analysis that didn’t go the right way. As a trader, you make decisions based on history and present factors, so sometimes, predictions may go wrong. However, wrong trades is not entirely to blame for liquidation.
- Learn when to cut loss:
Traders need to learn when it is most necessary to CUT LOSS. Knowing when to cut loss is also a technical skill. In fact, traders often calculate and preset a % of the trading capital which they are willing to lose, per trade. This is just one of several patterns and habit that traders need to adapt to, to become better at trading and avoid liquidation.
Other necessary skills include;
- Understanding patterns: Trading activities always happen in patterns that make price go long/bullish, or short/bearish. These activities are called FUNDAMENTAL events, and are used when conducting fundamental analysis. The effects of these events are often tradable, as a reaction must occur at their announcement. Hence, traders who are familiar with patterns can always take advantage of this opportunity and make profitable trades.
-Effective use of leverage: Leverage is important when trading, but traders need to be careful. While under leveraging your capital could make traders make lesser profits, over leveraging could make them lose their capital in just one bad trade. Hence, traders have been warned to always calculate their risk sum, and leverage with it. This way, in the case of a bad trade, exposure is limited, saving trader from liquidation.
- Diversify portfolio: Although this depends a lot on capital, every trader is advised to diversify their portfolio. In crypto, traders are advised to have portfolios in stables, then trading sums in the market they are trading. This simple move is also a form of diversification to avoid overexposures. Then with larger capital, traders can hedge funds in unstable, and be able to bear it as a form of long term investment.
- Sufficient knowledge of the market: You cannot survive in a battle you have no knowledge about. This is the same for trading. Whichever form of trading you decide to do (crypto, forex, or commodities), you must have knowledge about that market first. This is to avoid rookie mistakes that are careless and can be avoided.
- Emotional intelligence: This is arguable a traders strongest weapon. The ability to control emotions save traders from many reckless actions based on their emotions. Several human emotions (including sadness, enthusiasm, etc) can affect how traders perform. This has been an argument in favor of trading bots, but I strongly believe that a good trader should be meticulous in decisions making. This will make them more intelligent, and act only based on conviction and not impulse.
Conclusion.
It is important to note that these are personal observations as a trader with over 2 years experience (in forex and crypto). And I strongly believe that these insights are common knowledge in the active trading communities. So if you have more ideas or tips to share with someone who needs them, feel free to add your tips and suggestions.
