29.11.2021

How to trade cryptocurrency futures? Five essential principles for a beginner

As Bitcoin and Ethereum gain in popularity, more and more newcomers are coming to exchanges. Some of them simply trade cryptocurrencies (buy or trade directly with an asset), someone is interested in deriving more benefit from the price movement in the market.

At the time of this writing, Bitcoin has resumed its bullish rally after a two month drop. Cryptocurrencies are gaining traction again and traders may want to expand their options and maximize their current potential.

One way to capitalize on the market (beyond what simple spot trading offers) is by trading Bitcoin futures.

  • Cryptocurrency futures allow investors to speculate on the future value of cryptocurrencies. For example, participants can open a long position, betting on a rise in price, or open a short position, if they expect a fall.
  • Investing in cryptocurrency futures opens up more opportunities for portfolio growth. The leverage available when trading futures can easily multiply a portfolio multiple times in a single trade.
  • Another reason to trade futures contracts is hedging. Cryptocurrency futures can protect a portfolio and serve as a hedging tool when the market goes in an unfavorable direction.
What is cryptocurrency futures trading?

Trading cryptocurrency futures is very different from spot trading. First, cryptocurrency futures trading does not involve buying, selling, or holding the cryptocurrency assets themselves. Instead, you buy or sell a contract that reflects the value of the cryptocurrency at a certain date in the future.

Cryptocurrency futures allow investors to speculate on the future value of a cryptocurrency. For example, participants can open a long position, betting on a rise in price, or open a short position, if they expect a fall.

One of the most important benefits of cryptocurrency futures is the use of leverage. With leverage, traders can improve the efficiency of capital utilization as they are relieved of the need to fully leverage capital. However, users should always exercise caution: using leverage increases both potential rewards and risks. Traders should use a leverage that is convenient for them. For example, if you are conservative or new to cryptocurrency trading, 5x or 2x leverage is fine.

Leverage makes it possible to use futures transactions as a hedging instrument for a portfolio. If the price of an asset moves contrary to the trader’s assumptions, a futures trade that hedges from this arrangement will compensate for the loss.

Why Invest in Cryptocurrency Futures?

Investing in cryptocurrency futures opens up more opportunities for portfolio growth. The leverage available when trading futures can easily multiply a portfolio multiple times in a single trade.

Another reason to trade futures contracts is, as we said, hedging . Securing a portfolio can be challenging, especially in the cryptocurrency market. A strong line of defense for any portfolio is a futures contract (or several smaller contracts). Contracts can serve as hedges when prices go in an unfavorable direction.

Unlike spot trades, which only bring profit to the investor when the price rises, futures trades can be profitable even when the price falls. In addition, the ability to short or long an asset provides investors with greater flexibility and freedom in making short-term forecasts.

5 steps to get started effectively

Cryptocurrency trading is not the easiest thing to do. It will take you a long time to understand how changes and corrections occur in the market, how external factors influence these changes, what prompts traders to make decisions and much more. It is not surprising that with this amount of critical information, many young traders with little experience or knowledge end up losing their investment. This is why it is important to adhere to a specific strategy in every trade.

1. Define a trading strategy for yourself

Finding a trading strategy is more than just copying a highly profitable strategy presented on YouTube or social media. A truly effective trading strategy needs to be developed individually according to your personality traits, lifestyle, risk tolerance and long-term goals.

To find the best option, try the following steps:

  • Determine what type of trader you are
  • Define your risk tolerance and long-term financial goals
  • Determine the trading parameters that suit your personality type
  • Evaluate the effectiveness of each parameter and how you deal with them
  • Please make changes if you have problems
2. Develop a trading plan

A trading plan can help you better manage risk and develop consistency. When developing a plan, it is necessary to describe in detail the entry and exit of positions, including indicators of entry and exit, position sizing and the use of stop losses.

Having a trading plan has a number of advantages: it will relieve stress, help you use more opportunities for trades, teach you to follow trading habits, and promote purposeful development and a serious attitude towards trading.

3. Appropriate risk management

From the very beginning, the trader should think about risk management. And it starts with the rudimentary setting of boundaries for what you consider acceptable or unacceptable loss on a trade.

When trading futures, every dollar should be treated as if it was worth 100 times its actual value. Thus, if you have $ 1,000 in your account, you should not lose more than $ 10. Long-term planning like this requires a trader to approach each trade with a clear strategy. Thus, even small wins will lead to an increase in funds.

This risk management strategy protects your funds in the long term, provides realistic expectations and insulates you from unnecessary emotions.

4. Responsible trading

Emotional trading, gambling, compulsive trading are all irrational behaviors that can lead to the ruin of your trading career. To avoid this extreme, you need to minimize leverage and trading activity, set realistic goals for yourself, and never trade the money you need for your life (unless you know how to trade professionally and consistently).

Losses tend to accumulate quickly, which can negatively affect not only your bank account, but also your psyche. Not focusing on losses and avoiding “luck” trades are the basic principles of responsible futures trading.

5. Continuous learning

Every day brings us something new related to bitcoin or other cryptocurrencies. This industry is fascinating also by the fact that it is constantly developing. It is very important to track all changes that largely determine what is happening in the market.

Continuing education in cryptocurrency trading is essential to stay profitable. By contributing to a deeper understanding of market developments, it will enable better planning for the future.

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