Leveraged trading can be a powerful tool for amplifying potential gains, but it also magnifies potential losses. The key to using leverage successfully is diligent risk management. This guide will walk you through the core concepts of margin and liquidation and provide you with actionable steps to keep your account healthy and your positions secure.
Understanding the Key Concepts
Leverage: This allows you to open a position that is larger than your capital. For example, with $100 of collateral and 10x leverage, you can control a $1,000 position.
Initial Margin: The amount of collateral required to open a leveraged position.
Maintenance Margin: The absolute minimum amount of collateral required to keep a position open. Your account's total collateral cannot fall below the total maintenance margin required for all your open positions.
Margin Ratio (Account Health): This is the most important indicator of your account's risk level. It shows how close you are to your maintenance margin limit. On Quanto, you can monitor this in your "Account Margin" section. Liquidation occurs when your Margin Ratio reaches 100%.
Liquidation: This is a safety mechanism that automatically closes your position(s) when your Margin Ratio hits 100%. It is not a penalty, but a necessary process to prevent your account balance from falling into a negative value.
Proactive Strategies to Avoid Liquidation
The best way to manage liquidation risk is to be proactive. Here are six strategies you can employ:
1. Constantly Monitor Your Margin Ratio
This is your primary risk indicator. Make it a habit to check your "Account Margin" section frequently, especially during volatile market conditions. A rising Margin Ratio is an early warning sign that your position is approaching liquidation.
2. Add More Collateral
The most direct way to improve your Margin Ratio is to increase your Total Collateral. By depositing more supported assets (like $USDC
, $SOL
, or $QTO
) into your Quanto account, you increase your margin buffer and move further away from your liquidation threshold.
3. Reduce Your Position Size
If you cannot add more collateral, consider reducing the size of your leveraged position(s). Closing a portion of your trade lowers the Maintenance Margin required, which will immediately decrease your Margin Ratio and reduce your risk.
4. Use Appropriate Leverage
The amount of leverage you select directly impacts your liquidation risk. It determines the size of the "safety buffer" - the distance the market can move against your position before a liquidation is triggered.
Low Leverage (e.g., 2x-5x): Creates a large safety buffer. Your position can withstand a significant adverse price movement before being at risk.
High Leverage (e.g., 20x or more): Creates a very small safety buffer. Even a minor price fluctuation can be enough to trigger a liquidation.
A position with 50x leverage has a much smaller margin backing it than a 5x leverage position of the same size. Therefore, the 50x position will be liquidated much faster.
Avoid using the maximum available leverage unless you are an experienced trader with a clear strategy.
5. Set Strategic Stop-Loss Orders
A stop-loss order is a powerful tool that gives you control over your risk. By setting a stop-loss, you can automatically close your position at a predetermined price before it reaches the liquidation point. This allows you to define your maximum acceptable loss and protects the rest of your collateral.
6. Understand Your Collateral's Volatility
Remember that your Total Collateral is based on the LTV-adjusted market value of your assets. If you are using volatile assets as collateral, a drop in their price will reduce your Total Collateral, pushing you closer to liquidation - even if your trade's P&L is neutral. Periodically review the composition of your collateral.
A Practical Example
Imagine a trader has an open position and sees their Margin Ratio has risen to a concerning 85%. They can act immediately:
Option A (Add Collateral): They deposit more
$USDC
into their account. This increases their Total Collateral, and the Margin Ratio instantly drops to a safer level, for instance, 55%.Option B (Reduce Position): They partially close their position. This reduces their Maintenance Margin requirement, and the Margin Ratio also drops significantly.
Successful leveraged trading is synonymous with disciplined risk management. By actively monitoring your Margin Ratio, using tools like stop-loss orders, and understanding how your collateral and position size affect your risk, you can navigate the markets with greater confidence and security.
Always trade responsibly and never invest more than you are willing to lose.