Recently, I've seen many beginners crash their positions on contracts, all because of one reason—not understanding what liquidation means. Today, let's talk about this topic.

First, the definition: liquidation is basically when your losses become too large, and your margin in the account isn't enough, so the exchange forcibly closes your position. This isn't just a cryptocurrency thing; futures, forex, and stocks can also experience it. But why is liquidation especially common in the crypto market? Simply put, it's a leverage issue.

When I first started trading, I didn't understand what leverage was either. Actually, it's very simple: leverage is when the exchange borrows money for you, allowing you to make big trades with small funds. For example, if you only have $500 and use 100x leverage, you can operate a $50k position. Sounds exciting, right? The problem is, the risk is amplified 100 times.

Here's an example. Bitcoin price is $50,000, and you use $500 with 100x leverage to go long. When the price rises by 1%, your position changes from $50,000 to $50,500, earning $500. It doesn't sound like much, but that's a 100% return, doubling your principal. Conversely, if the price drops by 1%, you lose everything. That’s where liquidation comes from.

Interestingly, different exchanges have slightly different definitions of liquidation. Some consider it at a 90% loss, others at 100%. But the core logic is the same—if the margin isn't enough to maintain the position, the system will forcibly liquidate it. So rather than memorizing specific percentages, it's better to look directly at the liquidation price provided by the exchange, which is the most accurate.

So how can you avoid liquidation? First, the most straightforward way is not to use leverage at all. Really, I've seen too many people get liquidated out of greed. If you must use leverage, then reduce the multiple—3x, 5x is much safer than 100x.

Second, learn to set stop-loss orders. During big drops, don’t hold onto the hope that it will bounce back—close your position when needed. Also, avoid frequent trading and blindly copying others. The most dangerous thing is some people try to make a comeback after liquidation by adding more positions, which often leads to even bigger losses halfway through.

In perpetual contracts, there are two modes to watch out for. In cross-margin mode, all assets in the account serve as margin, so the position can last longer, but once liquidated, everything is gone. Isolated margin mode is much safer—each position has its own margin, so a liquidation in one won't affect others.

Finally, I want to emphasize that after liquidation, the exchange will charge a liquidation fee, which is quite high. So risk management is crucial—don't wait until liquidation to regret. Contract trading can be very profitable, but only if you stay alive.