How is the liquidation price of Upbit contracts calculated? How to avoid it?

The liquidation price of Upbit contracts is a crucial concept for traders to understand, as it determines the point at which a position will be forcibly closed to prevent further losses. This article will delve into how the liquidation price is calculated for Upbit contracts and provide strategies to avoid liquidation.

Understanding Upbit Contracts

Upbit offers futures contracts that allow traders to speculate on the future price of cryptocurrencies. These contracts are leveraged, meaning traders can control a larger position with a smaller amount of capital. However, this leverage also increases the risk of liquidation if the market moves against the trader's position.

Calculation of Liquidation Price

The liquidation price for Upbit contracts is calculated based on several factors, including the entry price, the amount of leverage used, and the maintenance margin requirement. The formula for calculating the liquidation price varies depending on whether the position is long or short.

Long Position Liquidation Price

For a long position, the liquidation price is calculated as follows:

• Entry Price - (Entry Price Maintenance Margin Requirement / Leverage)

Here, the Entry Price is the price at which the trader entered the position, the Maintenance Margin Requirement is the minimum amount of margin required to keep the position open, and the Leverage is the amount of leverage used.

Short Position Liquidation Price

For a short position, the liquidation price is calculated as follows:

• Entry Price + (Entry Price Maintenance Margin Requirement / Leverage)

In this case, the Entry Price, Maintenance Margin Requirement, and Leverage are defined similarly to the long position calculation.

Example Calculation

To illustrate, let's consider a trader who opens a long position on Bitcoin with an entry price of $30,000, using 10x leverage, and a maintenance margin requirement of 0.5%.

The liquidation price would be calculated as:

• 30,000 - (30,000 * 0.005 / 10) = 30,000 - 15 = $29,985

This means if the price of Bitcoin drops to $29,985 or below, the trader's position will be liquidated.

Strategies to Avoid Liquidation

Avoiding liquidation is essential for maintaining a healthy trading account. Here are some strategies that traders can employ to minimize the risk of liquidation:

Use Lower Leverage

One of the most effective ways to avoid liquidation is to use lower leverage. Higher leverage increases the risk of liquidation because it requires less market movement to reach the liquidation price. By using lower leverage, traders can withstand larger market movements before reaching the liquidation threshold.

Set Stop-Loss Orders

Setting stop-loss orders can help traders limit their losses and avoid liquidation. A stop-loss order will automatically close the position if the price reaches a predetermined level, preventing further losses. Traders should set their stop-loss orders at a level that is above the liquidation price to ensure they exit the market before liquidation occurs.

Monitor Margin Levels

Traders should regularly monitor their margin levels to ensure they have sufficient funds to maintain their positions. If the margin level falls below the maintenance margin requirement, the position will be at risk of liquidation. By keeping an eye on the margin levels and adding funds if necessary, traders can avoid liquidation.

Diversify Trading Strategies

Diversifying trading strategies can help reduce the risk of liquidation. Instead of relying on a single strategy, traders can use a combination of strategies, such as trend following, mean reversion, and breakout trading. By diversifying their approaches, traders can spread their risk across different market conditions and reduce the likelihood of liquidation.

Practical Steps to Implement Strategies

To implement these strategies effectively, traders can follow these practical steps:

• Choose Lower Leverage:
  • When opening a new position, select a lower leverage option from the available choices on the Upbit platform.
  • Consider using leverage of 2x to 5x instead of the maximum available leverage.
• Set Stop-Loss Orders:
  • Navigate to the trading interface on Upbit.
  • Select the position for which you want to set a stop-loss order.
  • Enter the desired stop-loss price, ensuring it is above the calculated liquidation price.
  • Confirm the stop-loss order.
• Monitor Margin Levels:
  • Regularly check the margin level of your positions on the Upbit platform.
  • If the margin level approaches the maintenance margin requirement, consider adding more funds to your account.
  • Use the margin calculator provided by Upbit to estimate the required margin for different positions.
• Diversify Trading Strategies:
  • Develop multiple trading strategies based on different market conditions.
  • Allocate a portion of your trading capital to each strategy to spread the risk.
  • Regularly review and adjust your strategies based on market performance.

Frequently Asked Questions

Q: Can the liquidation price change after opening a position?

A: Yes, the liquidation price can change if the trader adjusts the leverage or adds more funds to the position. However, it is important to recalculate the liquidation price after any changes to ensure it remains within a safe range.

Q: What happens if the market price briefly touches the liquidation price but then rebounds?

A: If the market price touches the liquidation price but rebounds quickly, the position may not be liquidated immediately. However, it is still at risk if the price continues to move against the position. Traders should monitor their positions closely in such situations.

Q: Are there any fees associated with liquidation on Upbit?

A: Yes, Upbit may charge a liquidation fee, which is typically a percentage of the position's value. Traders should be aware of these fees and factor them into their trading strategies.

Q: Can I manually close a position before it reaches the liquidation price?

A: Yes, traders can manually close their positions at any time before the liquidation price is reached. This can help avoid liquidation and potential fees associated with it.