Trading Futures In 2022: The Ins and Outs
“With high risk comes great responsibility.” That might be the first thing you need to know if you are bent on crypto trading futures. Not to bore you with the obligation of risk management, but it is essential to understand that futures contract trading is not all easy and risk-free. So, in this article, you will learn what futures trading is and how you can potentially thrive in the venture. But before anything else, let’s quickly take you through the ins and out of futures trading.
What Is Futures Trading?
By definition, crypto futures trading is the act of speculating on the value of digital assets at a future date. In simpler terms, you are involved with an asset’s predetermined price movements to make a profit or run at a loss. There is, however, one thing that you must note—to trade futures, you must be ready to oblige by the rules of the futures contracts.
If you are still confused about this system, let’s take you further. So, in this process, you, as a trader, do not necessarily need to own any Bitcoin or Ethereum. However, you can leverage on the price movements of any of these cryptocurrencies to predict their next move on the charts. Let’s take Bitcoin futures trading on a platform like Binance or Bitcoin Up.
Assuming the current Bitcoin price is $20,580. You, as a futures trader, can predict that at some point, Bitcoin will go lower to $19,000. At this point, you do not hold Bitcoin, but you’ve made a “bet’ that the underlying asset would hit that price. If it does, you make a profit. If it doesn’t, you probably get liquidated, depending on the leverage you use for the trade. That said, you need to understand two lingos used in cryptocurrency futures trading.
- Long position: In trading futures, choosing a long position means that a particular commodity or asset would rise in value. In other words—too long to buy.
- Short position: For the short position, it is the opposite of the long position. So, when you short an asset, you say that the coin would decrease from its worth when you entered the trade. You can also refer to shorting a trade as selling an asset.
However, whether you choose long or short positions, you should know that you are bound by the ” Futures contract.” No, don’t get confused, and you don’t need the services of a lawyer. Futures contracts are terms binding you to your involvement in the trade but let’s not spill the full information here. So, in the next section, we will break down the complexities of a futures contract.
Futures Contracts: A Quick Explanation
Futures contracts are standardised terms detailing all the parameters involved when you long or short a trade. So, as a crypto futures trader, you need to familiarise yourself with the conditions binding your involvement. This is considered necessary due to the volatility index of the cryptocurrency market.
In addition, it can also be vital to help you with proper risk management. As you probably know, the crypto market movement can be highly volatile due to consistent price swings. Hence, there is a need for you to be careful. That said, here are some things you need to note about a futures contract.
- The futures contract tells you how exactly the trade will be settled. In this case, it means how much profit you will be in. It also informs you of the potential loss if the outcome goes sideways. Other parts of the contract include:
- The contract’s expiry date
- The currency in which the contract will be recorded
However, you should note that futures trading is not explicitly for beginner traders. In fact, it is not a good way to start your crypto trading venture, as experienced investors also struggle and lose money to the market. Note that trading futures do not invalidate the crypto market volatility. Hence, trade futures with only money you can afford to lose.
How to Trade Futures In Five Simple Steps
Again, you should note that trading cryptocurrency futures is no child’s play, and there is a high risk involved. However, that does not stop you from trying. More importantly, knowing the steps involved with the trading would do you a lot of good and potentially save you from regular liquidation. So, in this part of the article, we will address the step you need to take to trade futures contracts.
Step 1: Find Your Trading Strategy
Like every other market, a trader or investor needs to have a strategy. It is the same when trading futures. However, you need to understand that creating a trading strategy is not just limited to choosing assets or trading pairs for traders. It is considering all other factors that could impact the crypto market movements.
For example, it could be assessing the trading volume, learning technical analysis, or following up on the news around the market. All these are important to help you achieve trading objectives and ensure you develop disciplined risk management.
Step 2: Never Stop Learning
Because of the crypto market volatility, traders must never stop learning. Besides the sometimes unpredictable price swings, the futures market can be subject to updates, and these updates will require more learning. So, keep up with developments around blockchain technology and the market at large, and you may do yourself a lot of good.
Step 3: Develop a Risk Management Strategy
It is no news that the crypto market can be very rewarding. For the futures market, it is even more rewarding. However, you should know that the same way it can be enriching is the same way you can lose your trading capital. Hence, it would be best if you created a strategy void of greed and extremely high risks.
Step 4: Set Reasonable Targets
Another critical step is to set targets that are not way overboard. Some traders want to make as much as 1000% ROI on everyday trading. Doing this will only plunge you into more losses, and you will most likely be emotional and lose your psychological management ability.
So, set reasonable targets to ensure you have fewer losses to worry about. You can do this by using the “Take Profit” and “Stop Loss” features available on your crypto platforms.
Step 5: Trade with Caution
Lastly, trade with caution. As much as futures trading can be profitable, you do not want to overuse your leverage. You must limit your trading to 5x to 10x leverage as a beginner. If you have become very confident, you can increase your leverage limit. One other thing you should not do is you should trade with money you can afford to lose. That is why it is important for you to be in full-time employment to have a stable source of income before becoming a trader.
Before You Trade, Know These Futures Contract Risks
While futures can be used as a hedge exposure, they can also be risky. So, in this last part, we will assess the risk associated with futures contracts.
- Trading futures means that you risk erratic price movements, and hence, you can lose the money invested in trade.
- Overconfidence is also any drug that can render you liquidated. Some traders get so confident that they do not use the stop loss or take profit features. In this case, you lose if the trade does not trigger at your target.
- The inability to follow leverage and margin account rules can also be risky. This is because there are set rules to use these trading accounts, and not understanding them could set the tone for massive losses.
In conclusion, remember that trading futures is risky. While this article can help reduce the risk of liquidations, it is still not investment advice. Please do your own research before investing.