I noticed that every time there are sharp movements in the crypto market, analysts record waves of liquidations on exchanges amounting to hundreds of millions. These are not just numbers — behind them are real traders who lost their money. Let’s understand how this works and how not to become a victim.

When trading with leverage, the exchange essentially gives you a loan to increase your position. It sounds attractive — you can control large sums with a small capital. But here’s the catch: if the market moves against you, losses grow at the same rate. Let’s say you have $100, and you trade with 5x leverage. Your position becomes $500. If the asset rises by 10%, you earn $50 — which is 50% of your initial capital. Nice? But if the price drops by 10%, you lose the same $50, and your margin is halved.

Liquidation occurs when the exchange forcibly closes your position because you can no longer keep the trade open. There’s a simple formula: with 5x leverage, a position is liquidated if the price moves 20% against you (100 divided by 5). It may seem like a lot, but in the volatile crypto market, this can happen within hours or even minutes.

I remember a case from December 11-12, 2023. Bitcoin plummeted by more than $3,000, and the wave of liquidations on exchanges totaled about $0.5 billion. Most positions were long — people bet on the rise. The market reversed, and they were wiped out.

How to protect yourself? The main tool is a stop-loss. This is an order for the exchange to automatically sell your asset if the price drops to a certain level. No need to sit and watch your account burn. Set a stop-loss — and sleep peacefully.

Example: you have $5,000 in your account, you take a margin of $100 with 10x leverage, open a position of $1,000, and set a stop-loss 2.5% below entry. The maximum loss is $25, which is only 0.5% of the deposit. Without a stop-loss, the position is liquidated if the price falls by 10%.

The main rule: the size of leverage, the size of the position, and the stop-loss should be chosen based on your strategy and acceptable risk. Lower leverage does not guarantee smaller losses if you open a huge position. Everything is interconnected.

Most regulators have already realized this and started to limit the offering of leveraged instruments to retail traders. And they are right to do so. If you’re a beginner, first learn to trade without leverage. Once you understand the basics and develop a clear risk management strategy, only then can you experiment with margin. Remember: liquidations on exchanges are not an exception but the norm. Prepare for the worst-case scenario, and you will stay in the game.