Cryptocurrency trading has a dynamic environment and therefore comes with various peculiarities. Over the years, it introduced itself to financial instruments for catering to the diverse needs of traders. One such instrument that has gained much popularity is perpetual futures. Perpetual futures offer a distinctive method of speculating on the price movements of various cryptocurrencies, providing traders with flexibility and the opportunity to profit from both rising and falling market prices. This article will focus on practical examples to help beginners explore and investigate the practical examples regarding aspects of crypto trading.
What are Perpetual Futures?
Perpetual Futures are a form of financial derivative, that enables many traders to speculate or assume the future price movement of an underlying asset, such as cryptocurrencies, Bitcoin, Ethereum, and many others. It is different than traditional future contracts and carries a fixed expiration date. Perpetual futures, however, are contracts that come with expiration dates, not expire. As the name suggests, perpetual futures contracts are perpetual, meaning they keep on rolling forever, unless stopped otherwise.
Some Salient Features of Perpetual Futures
No Expiration Dates
Traditional futures are contracts that have expiration dates, requiring traders to close their positions before the contract matures. Perpetual futures eliminate this constraint, allowing traders to hold positions for as long as they want to.
For maintaining the price of perpetual futures, as to maintain its price close to the spot market, a funding rate is established. This funding rate is a periodical exchange between long and short positions, ensuring alignment with the underlying asset’s market price.
Perpetual futures normally offer higher leverage, thus enabling traders to control larger positions, with a smaller capital. As the leverage amplifies the profits, it also amplifies the chances of losses, making it a risky investment for beginners.
Mark Price vs. Last Price
In the case of perpetual futures, mark price is usually used to calculate unrealized profits and losses, preventing further manipulative tactics. It is normally used on an index of spot market prices, rather than the last traded price on the futures exchange.
Trading Perpetual Futures: A Step-by-Step Guide
Now let us talk about the process of trading perpetual futures using some practical examples:
Choosing a Reliable Exchange
While trading perpetual futures, it is advisable to select a reputable exchange that offers security and a seamless trading experience. Some well-known exchanges in this case are Binance, Huobi, KuCoin and BITFLEX.
Create Account and Deposit Funds
After choosing an exchange, create an account with the required information. As your account is verified, deposit funds into your trading account. Most exchanges are now accepting deposits in various cryptocurrencies and fiat currencies as well.
Understanding Leverage and Risk Management
Before placing any trade, grasp the concept of leverage and its implications. Leverage amplifies both gains and losses, so it is important to use it wisely. Establish risk management practices, such as setting up stop loss orders, and limiting potential losses.
Choosing Cryptocurrencies Pair
Select the cryptocurrency pair you want to trade in. For example, if you believe Bitcoin’s price will rise, you might be choosing a BTC/USD perpetual futures contract and go for a long position.
Analyzing the Market
Conduct thorough technical and fundamental analysis, to make informed decisions. Utilize tools such as charts, indicators, and news sources to assess the market conditions, and identify entry, and exit points.
Placing a Trade
Once you are analyzing the market, it is time to place a trade. Decide whether you want to go for long (buy) or short (Sell) based on the market analysis. Then enter the desired position size and set the appropriate leverage.
Monitoring and Adjustment
After ending a trade, actively monitor the market. Be prepared to adjust the trading strategy based on changing market conditions. Utilize trailing stop loss and take profits orders to automate the parts of your trading plan.
Closing the Trade
As you achieve the profit targets or if the market moves against the position, consider closing the trade. By closing trade, we mean selling our position and contract if you are long or buying if you are short.
A Practical Example: Going Long on BTC/USD Perpetual Futures
Let us consider the hypothetical scenarios where you want to go long on Bitcoin’s price using BTCUSDT’s perpetual future.
After analyzing the market, if you believe Bitcoin’s price is poised to rise due to positive and green technical indicators, you can go for a long then.
Placing the Trade
If you decide to go long on BTCUSDT-P futures, you can enter the position size of 1 BTC with 10x leverage, meaning that you control a position equivalent to 10BTC.
Monitoring the Trade
As the market progresses, you closely monitor your trades. If the price increases, your profits will soar, and amplify due to leverage. Conversely, if the price decreases you can run the chance of liquidating your position and bear the losses.
When the price of your position reaches the predetermined profit target, you can decide to close the trade or else it would be closed on its own. Alternatively, if the market turns against you, then you might choose to cut your losses by closing the position yourself or placing a Stop Loss.
Risk Management Tips in Perpetual Futures
Setting Up Stop Loss Orders
Determining the maximum amount of loss, you are willing to tolerate and set stop loss orders accordingly.
Diversifying your Portfolio
Avoid concentrating your capital on a single trade, try to diversify your portfolio by helping to mitigate risks and associate the individual assets.
Understanding Liquidation Levels
Be aware of liquidation levels, when the price at which is the price at which your position will be automatically closed to prevent further losses.
Keep abreast of the news and developments related to news events that can impact cryptocurrency prices and stay informed about what new changes might take place.
Perpetual futures trading provides an avenue for crypto enthusiasts to capitalize on the price movements of digital assets, without owning them. As the potential for profits is enticing, beginners need to approach this form of trading, with judiciousness, and following a systematic approach. Conduct thorough market research, and run fundamental and technical analysis, to further bolster your trading journey. Remember that consistent learning and staying informed about the market trends can help you achieve in the long run.
BITFLEX is a cryptocurrency exchange platform that offers traders a secure, easy-to-use, and convenient way to buy, sell, and trade cryptocurrencies. Our platform has been designed with investors of all levels in mind, whether they are just starting or experienced traders. We offer various features and tools to help users make the best trading decisions possible, including advanced charting and analytics, real-time market data, and various customizable trading interfaces. At BITFLEX, we are dedicated to empowering our users and helping them reach their financial goals.
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