Crypto futures trading has gained popularity among traders looking to leverage market volatility for better profits. However, understanding the fundamentals is crucial to minimize risks and make informed trading decisions.
This guide from FMCPAY provides an in-depth look at crypto futures trading for beginners, covering everything from technical terms to a step-by-step guide to get started.
1. Overview of Crypto Futures Trading for Beginners
For those new to the concept, crypto futures trading can be overwhelming. Fundamentally, it involves speculating on the future price of a cryptocurrency without actually owning the asset. Let’s explore what futures trading is and how it works in the crypto world.
1.1. What is futures trading?
Futures trading is trading between financial contracts where two parties agree to buy or sell an asset at a predetermined price on a specified future date. These contracts are standardized agreements traded on many popular crypto exchanges like Binance, BitMEX, OKEx,… Each contract must specify the asset, the amount, the price, and the expiration date.
Traders can go “long” (buy) if they believe the price will rise or “short” (sell) if they expect a decline. This flexibility makes futures trading an attractive option for those looking to hedge their positions or capitalize on market swings. However, it also requires a solid understanding of the risks involved, especially for those who navigating crypto futures trading for beginners.
Futures trading is not just about predicting price directions, but also involves leveraging positions. Leverage allows traders to control larger positions with a smaller amount of capital. For example, with 10x leverage, a trader only needs a capital of $1,000 to control a $10,000 position.
While this amplifies potential gains, it also increases the risk of substantial losses, that’s why newcomers should be especially careful to assess their risk tolerance and trading strategy.
1.2. How does futures trading work?
To understand how a crypto future trade works, let’s take a look at the below example:
Suppose a trader believes that Paynet Coin (PAYN) will increase in price over the next month. The current price of PAYN is $0.5, and the trader decides to enter a long position with a futures contract for 10,000 PAYN at $5000 with an expiration date set for one month later. This future contract has 10x leverage, which means the trader only needs to deposit $500 to control a $5000 position.
Scenario 1 – Profit: If PAYN’s price rises to $1 by the contract’s expiration date, the position then closes and the trader profits from the price increase. The profit would be the difference between the selling price ($1) and the buying price ($0.5), totaling $0.5 x 10,000 PAYN = $5000. Because they used 10x leverage, their initial $500 margin now results in a $5,000 profit, significantly increasing their return.
Scenario 2 – Loss: Conversely, if the price of Paynet Coin drops to $0.25, the trader would face a loss. The loss would be the difference between the buying price ($0.5) and the current price ($0.25), totaling $0.25 x 10,000 PAYN = $2500 loss. Given the leverage used, the trader’s initial $500 margin could be at risk of liquidation unless additional funds are added to cover the loss.
This example illustrates how crypto futures trading can offer substantial profit opportunities but also presents significant risks, especially when leverage is involved. That’s why crypto futures trading for beginners requires careful learning and a cautious approach to navigate the market effectively.
2. Technical Terms in Crypto Futures Trading
You may have grasped the fundamentals of futures trading, now it’s time for the technical keywords used in crypto futures trading for beginners.
2.1. Long & Short
Traders can take a “long” position (buy position) if they believe the price of a cryptocurrency will rise or a “short” position (sell position) if they expect the price to fall. Both strategies allow traders to profit from price movements, making futures trading versatile. Profits are realized if the trader’s prediction is correct by the contract’s expirated date.
2.2. Expired date
Some futures contracts have an expiration date, meaning the contract will be settled at a specific future date. Traders must either close their positions before the expiry or let them be settled automatically. This is common in traditional futures contracts but not in perpetual futures, which do not have an expiry date. The expiry date can affect the contract’s price as it nears settlement, leading to increased volatility.
2.3. Leverage
Leverage is a powerful tool in futures trading that allows traders to control a large position with a relatively small amount of capital. For example, a 10x leverage means that a trader can control a position 10 times larger than their initial investment. Traders must understand the implications of using high leverage and employ risk management strategies accordingly when engaging in crypto futures trading for beginners.
2.4. Margin
Margin is the collateral that a trader must deposit to open and maintain a leveraged position. There are two types of margins: initial margin and maintenance margin. The initial margin is the amount required to open a position, while the maintenance margin is the minimum amount needed to keep the position open.
If the account balance falls below the maintenance margin, a margin call occurs, requiring the trader to add more funds or they have to risk liquidation.
2.5. Liquidation
Liquidation occurs when a trader’s position is automatically closed by the exchange due to insufficient margin to cover potential losses. This often happens when the market moves against a highly leveraged position beyond a certain threshold, wiping out the trader’s account. Understanding liquidation risks is crucial in crypto futures trading for beginners.
2.6. Stop-loss
A stop-loss in crypto futures trading is a risk management tool designed to protect traders from significant losses. It functions by automatically closing a position when the price of the asset reaches a predetermined level, ensuring that losses do not exceed a specified amount. Stop-loss acts as a safeguard against unexpected market movements and reduces emotional decision-making.
3. Main Types of Futures Trading
There are two main types of futures contracts that that widely used among traders: Traditional Futures and Perpetual Futures. Both have unique characteristics and can be used to develop various strategies in crypto futures trading for beginners. Knowing how each type works will help you choose the one that aligns with your trading goals.
3.1. Traditional Futures
Traditional futures contracts are agreements to buy or sell an asset at a predetermined price on a specific future date. These contracts are set with an expiration date, meaning the contract must be settled by that date, either by selling/buying the asset or by closing the position.
This fixed expiration date can help traders plan their strategies better and mitigate long-term exposure to volatility. However, these contracts require close attention to market movements as the expiration date nears, as traders must decide whether to close their positions, roll them over, or let them expire.
This type of trading is suitable for those who prefer a more predictable and time-bound trading environment. They are also commonly used by institutional investors and traders looking to hedge against potential price fluctuations in the crypto market.
3.2. Perpetual Futures
Perpetual futures contracts are a newer and increasingly popular form of trading in the crypto market. Unlike traditional futures, perpetual futures do not have an expiration date, allowing traders to hold their positions indefinitely, as long as they meet margin requirements. This makes them highly favored in crypto futures trading for beginners because they offer more flexibility and are easier to manage than traditional contracts.
Perpetual futures are also unique because they use a mechanism called a “funding rate” to keep the contract price aligned with the spot market price. When the market is bullish, and perpetual futures prices are higher than the spot price, long position holders pay the funding rate to short position holders. Conversely, when the market is bearish, short position holders pay the funding rate.
Perpetual futures may allows for more seamless trading but also requires beginners to be aware of potential funding costs and market volatility. Therefore, always remember to employ risk management tools like stop-loss orders and carefully monitor your positions.
Read more: Understanding the Pros & Cons of Perpetual Futures Contracts
Overall, understanding both traditional and perpetual futures provides a foundation when making crypto futures trading for beginners, helping them choose the best strategy that fits the market landscape.
4. Pros of Crypto Futures Trading
Futures trading in the crypto market offers several benefits that appeal to both new and experienced traders. These pros range from the ability to leverage positions to potential profits in both rising and falling markets.
Low Capital
One significant advantage of futures trading is the ability to enter the market with a relatively small amount of capital. Compared to spot trading, futures contracts allow for leveraging investments, which can amplify potential returns without the need for a large initial investment, making it accessible for newcomers.
High Leverage
Futures trading is known for its high leverage which may be up to 150% of the capital, allowing traders to gain greater exposure to price movements with less capital. This feature can enhance profit potential significantly, although it also increases the risk of substantial losses. Understanding and managing leverage is crucial.
Short-Selling
Unlike spot trading, futures contracts enable traders to profit from falling prices through short-selling. This flexibility allows traders to take advantage of market downturns, offering more strategic options compared to the one-directional nature of spot trading.
Predictable Costs
The costs that come with traditional futures trading are often predictable. Traders can see fees and margin requirements upfront, which helps in better financial planning and managing large trades effectively. Perpetual futures, on the other hand, have more volatile costs depending on market conditions and how long the position is open.
Hedging Potential
Futures contracts are an effective tool for hedging against adverse price movements. Traders can protect their existing positions or portfolios from market volatility by locking in future prices. This hedging ability is particularly valuable in the unpredictable crypto market.
Versatile Strategies
The futures market supports a range of sophisticated trading strategies beyond basic buying and selling. Traders can use techniques like spreads, straddles, and other derivatives to adapt to various market conditions, offering extensive opportunities for strategic trading.
5. Cons of Crypto Futures Trading
For those exploring crypto futures trading for beginners, always be aware of their risks and downsides, as a poorly executed strategy can quickly lead to difficult situations.
Complexity
Futures trading involves a complex set of concepts, including contract specifications, margin requirements, and expiration dates. For beginners, this complexity can be challenging, requiring a thorough understanding to trade successfully.
High Risk
The high leverage available in futures trading can lead to significant financial losses if the market moves unfavorably. This heightened risk is a crucial consideration when comparing spot trading vs futures trading, as even small price changes can have a substantial impact on profitability.
Margin Calls
Futures traders are subject to margin calls if their position moves against them. If the account balance falls below the required margin, traders may need to add funds or face liquidation of their positions, which can result in unexpected losses.
Expiration Deadlines
Standard futures contracts come with expiration dates, necessitating that traders close or settle their positions by a specified date. This requirement can add pressure and complicate trading strategies, potentially leading to losses if positions are closed at less favorable prices.
Higher Fee
Trading futures often incurs higher fees compared to spot trading. These fees include trading commissions and margin costs, which can reduce overall profitability. Traders should factor in these expenses when evaluating futures trading options.
6. Step-by-step Guide to Get Started with Futures Trading
Crypto futures trading for beginners can be both exciting and challenging. This step-by-step guide will walk you through the essential steps needed to begin trading crypto futures effectively.
Step 1. Understand the Basics
Before diving into crypto futures trading for beginners, it’s crucial to have a solid understanding of the basics. Learn about futures contracts, how they work, and the underlying principles of trading. Familiarize yourself with key terms such as leverage, margin, and contract expiration to build a strong foundation.
Step 2. Choose a Reputable Exchange
Selecting a reliable trading platform is a critical step. Look for an exchange that offers a user-friendly interface, strong security features, and a range of futures contracts.
Normally CEXs (centralized exchanges) have more features, more polished UX, and lower fees than DEXs. Be sure that the platform you choose is well-regarded within the crypto community and offers good customer support.
Step 3. Develop a Trading Strategy
Successful crypto futures trading for beginners requires a solid trading strategy. Decide whether you’ll use technical analysis, fundamental analysis, or a combination of both. Develop a clear plan that outlines your trading goals, risk tolerance, and strategies for entering and exiting positions.
Step 4. Start with a Demo Account
Many exchanges offer demo accounts where you can practice trading without risking real money. Use this opportunity to familiarize yourself with the trading platform and test your strategies. This practice can help you gain confidence and refine your approach before trading with real funds.
Step 5. Open and Fund Your Account
Once you’ve chosen an exchange, you’ll need to create an account. This typically involves providing personal information and completing a verification process. After your account is set up, deposit funds into it. This capital will be used to trade futures contracts, so ensure you deposit an amount you’re comfortable with.
Step 6. Execute Your Trades
With your strategy in place and a funded account, you can begin trading. Place your first futures orders according to your strategy. Monitor your positions closely and be prepared to adjust your strategy as needed based on market conditions.
Step 7. Monitor and Adjust
Continuous monitoring an important step in crypto futures trading for beginners. Track your trades and analyze their performance regularly. Be prepared to make adjustments to your strategy based on market trends and your trading experiences.
7. Common Mistakes & How to Avoid Them
As you begin, avoiding common pitfalls in crypto futures trading for beginners is crucial for long-term success. Here are some typical mistakes and tips on how to steer clear of them:
7.1. Overleveraging
Crypto futures trading often involves high leverage, which can magnify both gains and losses. A common mistake is overleveraging, where traders use excessive leverage in the hope of maximizing profits. This can lead to substantial losses if the market moves against their positions.
To avoid this, start with lower leverage and gradually increase it as you gain more experience and confidence.
7.2. Emotional Trading
Allowing emotions to dictate trading decisions is a common mistake in crypto futures trading for beginners. Fear and greed can lead to impulsive trades and inconsistent results. Maintain a disciplined approach by sticking to your trading plan and avoiding emotional reactions to market fluctuations.
7.3. Neglecting Risk Management
Effective risk management is vital in futures trading. Beginners often overlook setting stop-loss orders or fail to manage their overall risk exposure. Implementing risk management techniques, such as setting stop-loss and take-profit levels, can help protect your investments and minimize potential losses.
7.4. Lack of Research
Entering trades without sufficient research or understanding of market conditions can lead to poor decision-making. Ensure you conduct thorough research before placing trades, including analyzing market trends, news, volatility indicators, and potential impacts on crypto prices. This preparation keeps you from being off guard by sudden price swings, one of the most challenging aspects of crypto futures trading for beginners.
Conclusion
Starting with crypto futures trading for beginners can be both exciting and challenging. The solid foundation for successful trades is set by understanding the fundamental concepts, how it works, along with its pros & cons.
You are now ready to join the futures market with greater confidence through the knowledge gained. The key to thriving in crypto futures trading for beginners lies in continuous learning and disciplined execution.Stay tunned with FMCPAY for more interesting & valuable crypto insights!