Recently, I’ve seen a lot of beginners get wiped out in futures trading. In fact, it often comes down to one word—liquidation.

Simply put, liquidation happens when your losses are too large and the margin in your account isn’t enough, so the exchange will forcibly close your position. This issue can occur in areas such as virtual currencies, futures, and forex.

Why does liquidation happen? The core reason is leverage. Many people like to use a small amount of money to trade with several times—even dozens of times—the trading leverage. This is what leverage is. The exchange is essentially lending you money, and you use that borrowed money to amplify your gains, but it also amplifies your risks. Just like the leverage principle in physics—when the force you apply is greater, the counterforce is also greater.

Let’s take an example. If Bitcoin’s price is 50,000, and you use 500U with 100x leverage, the value of your position is 50,000. If the coin price rises by 1%, your position becomes 50,500, and you earn 500. Sounds good, right? The problem is, if the coin price drops by 1%, you get liquidated right away, and your principal is wiped out. That’s why people say high returns and high risks are one and the same.

Each exchange calculates liquidation standards a bit differently. Some liquidate at 90% loss, others at 100%, so when you trade, it’s best to directly check the liquidation (forced liquidation) price provided by the exchange.

To avoid liquidation, my advice is these:

First, if you can, don’t trade with contract leverage. If you really want to trade, choose a low leverage multiple—don’t jump straight to 100x. Second, have a stop-loss mindset. When there’s a big drop, don’t rely on luck—if you should close the position, then close it, and decide decisively. Next, don’t overtrade excessively, and don’t blindly follow others. Finally, never keep adding to your position after you’re already losing in the hope of turning things around—this will only pull you deeper.

One detail many people ignore: after liquidation, the exchange charges a liquidation and settlement fee, and this fee is quite high. So instead of regretting afterward, it’s better to be careful from the start.

Here’s another small piece of knowledge: in perpetual contracts, there are two modes. In the full-margin mode, all the assets in your account are used as margin—liquidation happens later, but once it happens, everything is gone. In the isolated-margin mode, each position has its own independent margin—if one position is liquidated, it doesn’t affect your other positions, so risk is better distributed.

In short, using leverage means you have to take on the risk—that’s a basic rule of trading. I hope everyone can treat the issue of liquidation rationally, and don’t put your principal on the line just because of momentary greed.