Auto-Deleveraging
Auto-Deleveraging in Crypto Futures Trading
Auto-deleveraging (ADL) is a mechanism used in crypto futures trading to manage risk when a trader’s position is liquidated, and the liquidation engine cannot fully cover the loss. This article explains what auto-deleveraging is, how it works, and provides tips for beginners to avoid it.
What is Auto-Deleveraging?
Auto-deleveraging occurs when a trader’s position is liquidated, but the liquidation engine cannot fully cover the loss due to insufficient liquidity in the market. In such cases, the system automatically reduces the positions of profitable traders to cover the deficit. This process ensures that the exchange remains solvent and can fulfill its obligations.
How Does Auto-Deleveraging Work?
When a trader’s position is liquidated, the system attempts to cover the loss using the insurance fund. If the insurance fund is insufficient, the system identifies profitable traders with positions opposite to the liquidated one and reduces their positions proportionally. The process is automated and prioritizes traders with the highest leverage and profitability.
Example of Auto-Deleveraging
Suppose Trader A has a long position in Bitcoin futures with high leverage, and the market suddenly drops, leading to liquidation. If the insurance fund cannot cover the loss, the system may reduce the positions of profitable traders with short positions. Trader B, who has a profitable short position, might see their position partially closed to cover Trader A’s loss.
How to Avoid Auto-Deleveraging
While auto-deleveraging is rare, it can be avoided by following these tips:
- **Use Proper Risk Management**: Avoid over-leveraging your positions. Use stop-loss orders to limit potential losses.
- **Monitor Market Conditions**: Stay informed about market volatility and liquidity. Avoid trading during highly volatile periods.
- **Diversify Your Portfolio**: Spread your investments across different assets to reduce risk.
- **Use the Insurance Fund**: Some exchanges, like Bybit and Binance, have insurance funds to cover losses. Ensure you understand how these funds work.
Getting Started with Crypto Futures Trading
If you’re new to crypto futures trading, follow these steps to get started:
1. **Choose a Reliable Exchange**: Register on trusted platforms like Bybit or Binance. 2. **Learn the Basics**: Understand how futures contracts work, including leverage, margin, and liquidation. 3. **Start Small**: Begin with small positions and low leverage to minimize risk. 4. **Practice Risk Management**: Use tools like stop-loss orders and position sizing to protect your capital.
Risk Management Tips for Beginners
- **Set a Stop-Loss**: Define a price level at which your position will automatically close to limit losses.
- **Avoid Over-Leveraging**: High leverage can amplify both gains and losses. Use leverage cautiously.
- **Stay Informed**: Keep up with market news and trends to make informed trading decisions.
- **Use Demo Accounts**: Practice trading with demo accounts to gain experience without risking real money.
Conclusion
Auto-deleveraging is a safety mechanism in crypto futures trading that ensures the stability of the exchange. While it’s rare, understanding how it works and following proper risk management practices can help you avoid it. Start your trading journey on trusted platforms like Bybit and Binance, and always prioritize learning and risk management. Happy trading!
Sign Up on Trusted Platforms
The most profitable cryptocurrency exchange — buy/sell for euros, dollars, pounds — register here.
Join Our Community
Subscribe to our Telegram channel @cryptofuturestrading for analytics, free signals, and much more!