Crypto futures markets are continuously growing and gaining more popularity. There are many great trading platforms offering loads of trading tools and the ability to use trading bots.
These platforms typically generate profits from various kinds of interest or transaction fees, depending on the type of instrument traded. Of course, trading any kind of futures contracts can be risky, especially since most traders opt to use leverage to maximize their profits.
Let’s take a more in-depth look at crypto futures, what they are, and how to trade them for a profit.
What are Crypto Futures Contracts?
Futures contracts are defined as legal agreements to buy or sell an asset at a predetermined price at a specific future time. Imagine two investors interested in Bitcoin, one promises to sell it at an agreed price, and the other one swears to buy it at the settlement date. These futures contracts allow speculators to guess and profit from changes in an asset’s price.
Traders can also use futures contracts to hedge against disadvantageous price movements. For example, if you own 1 BTC and you’re worried the price may fall, you can enter a futures contract that gives you the right to sell at current prices even if things change in the future. This would protect you in case of a sudden decrease in value.
Futures contracts come in several varieties. One of the most popular and perhaps easiest to start with is perpetual futures contracts. Since many investors are highly profitable trading these types of contracts, we will focus our explanation on this instrument.
How do Crypto Perpetual Futures Contracts Work?
Like futures contracts, these are agreements between buyers and sellers to engage in a future transaction. However, there is no specific settlement date, meaning that a trader can choose to close their position or execute their contract any time they wish.
All of these theoretical explanations may be somewhat confusing. To simplify things, let’s explore how perpetual contracts actually work on a crypto exchange.
The first thing to understand is that these contracts allow traders to profit by correctly guessing the direction of prices for any crypto without actually having to buy and sell that coin directly.
Take Phemex’s ETH/USD perpetual contracts, for example. The exchange allows you to choose the direction in which you think the price will go.
- If you long (buy) these contracts, you are betting that the ETH price will rise in terms of USD. If you short (sell), you are betting that the price will fall.
- Say you choose to long a sum of contracts worth 1 ETH. This means that for every dollar ETH rises in value, you profit 1 dollar (minus fees).
- Because perpetual contracts don’t have any expiration dates, you can keep your contracts or position open as long as you want.
- Once you’re satisfied with your profits, you can close your position, and the exchange will immediately pay you your profits in a stablecoin such as USDT.
In this manner, a trader can profit from ETH’s price movements without ever having to purchase or trade ETH. Instead, they simply have to guess the correct direction of the price.
The exchange maintains different mechanisms such as funding fees to ensure the ETH/USD contracts’ price will always follow the price of real ETH. Similarly, the platform takes care of matching you with a counterparty. So whether you are longing or shorting, as soon as you close your position, profits are automatically distributed, and losses automatically deducted.
Phemex offers a wide range of perpetual crypto futures contracts tradeable on a 24/7 basis for most countries.
Build Up a Trading Plan
The basics of crypto futures contracts are pretty easy to understand. Now that you have a firm grasp on how these contracts operate, it is time to move on to creating a responsible trading plan.
A basic trading plan should have two parts:
- Risk management
Countless books have been written on trading strategies. Today, technical analysis is seen as an essential skill for all traders. By using a range of technical indicators that measure various aspects of the market, you should be able to identify profitable entry and exit points.
These same tools and concepts are also employed with algorithmic trading operations. Indicators include trading volumes, moving averages, and Bollinger bands.
We can’t offer you any specific trading advice in terms of technical analysis. Still, you need to research these tools before deciding to invest and actively participate in the market. Phemex has a Crypto Academy with a large selection of educational materials that should help you attain the knowledge you need.
Another good idea is to use a demo account to try out your strategies before working with real money. Phemex offers simulated trading accounts that let you practice with virtual funds until you are ready.
The most important aspect of any trading strategy is risk management –especially when leverage is involved.
Leverage allows you to take on positions that are much larger or valuable than your original investment.
Following the example we set above, if you have enough funds to open a position worth 1 ETH, Phemex actually allows you to use up to 20x leverage, making your position worth 20 ETH. This means that you actually profit 20x more than what your original investment would normally allow.
However, just as your potential for gains gets multiplied, so does your risk of loss. A price movement against you will be roughly amplified by 20x as well, meaning small negative changes can liquidate your positions entirely.
With the increased risks introduced by leverage, the use of Stop Loss orders is critical. A stop-loss can automatically close your positions and mitigate your losses after a certain predefined threshold has been met. Understand the risks before you open a position – and stay safe!
Choose a Trusted Exchange
As mentioned above, there are various exchanges and trading platforms out there, and you need to understand where you are sending your tokens.
Other than reputation, there are a few considerations when choosing a crypto futures exchange. You will need to make sure that the exchange accepts clients from your country, allows you to deposit funds securely, and supports the kind of trading assets that fit your style.
Here are a few crypto futures exchanges to consider:
Be sure to do some research, develop a solid trading strategy, and put risk management first – and you too can become a profitable crypto futures trader!