06.12.2021

Trader’s Glossary: Key Concepts When Trading Cryptocurrency Futures

Traders and market participants use a common vocabulary, which is useful for you to master. In this article, we will discuss some key terms that anyone who trades and wants to understand how futures trading works should be known.

It is useful to use volume in trading analysis, especially if you want to get information about the strength of market trends. Volume is often used to gauge the degree of volatility, especially in cryptocurrency markets.

Traders should use the appropriate leverage for them. For example, if you are conservative or new to cryptocurrency trading, 5x or 2x leverage is fine.

By trading on an exchange that has a large-cap insurance fund, traders do not need to worry about socialized losses as the exchange will be liable for the scarcity. Binance operates several insurance funds to ensure that there is sufficient coverage for losses in the event of spikes in volume.

Funding rates

Funding is periodic payments to traders or from traders depending on the direction of their trade. The financing rate calculation consists of an interest rate and a premium. Premiums are determined based on the difference between perpetual and spot prices. At the same time, interest rates on Binance Futures are set at 0.03%.

These rates are often used by exchanges and markets to prevent any price discrepancies in both markets. Traders should be aware of these as they determine the daily cost of holding a perpetual position and can also be used as an indicator of sentiment in the futures market. For example, high funding rates are often a sign of a bull market, where traders believe the market is growing so strongly that they are willing to pay a premium for a long.

Open interest 

Open Interest is a tool that can be very useful for traders. This indicator in real time reflects the total number of open positions held by market participants. Open interest is determined by adding the number of all open deals and then subtracting the number of closed deals from this number.

Traders often use open interest to understand how much capital is flowing into and / or out of the market. When more capital enters the market than it leaves, open interest rises. The converse is also true. Thus, open interest can give you an idea of ​​market sentiment at any given time. Open interest is believed to be closely related to volume, the next term on our list.

Volume

Volume is a measure that is used to determine the number of individual units of an asset that are traded in the market. When the exchange negotiates a deal price, this data is used to update the market volume indicator.

Traders can benefit from using volume in their analysis, especially if they are interested in gaining insight into the strength of market trends. Volume is often used to gauge volatility, especially in cryptocurrency markets. So, for example, if the trading volume is high, and the price of the cryptocurrency is volatile and tends to grow, then this upward trend is reasonable.

Leverage

Leverage is an important element of futures trading. It can bring the trader a significant profit from the transaction. But as generous as this reward may be, traders run the risk of suffering an equally significant loss. Before deciding on the amount of leverage, investors should study the general principles that will guide them in the future.

The three most important are:

  • Maintain a low level of leverage.
  • Use stop orders to reduce losses and protect capital.
  • Limit the amount of capital used in each trade to 1% or 2% of the total capital.

Traders should use the appropriate leverage for them. For example, if you are conservative or new to cryptocurrency trading, 5x or 2x leverage is fine.

The appropriate level of leverage is determined by the trader’s experience, risk tolerance and comfort level when trading in the cryptocurrency markets. Novice traders should always exercise caution as they are just learning to trade and gaining experience.

Initial and maintenance margin

The initial margin is the percentage of the position value that must be contributed by the investor before opening a position. The initial margin is directly related to the leverage applied to the position. For example, if you choose 20x leverage, the initial margin will be 5% of the total position. With a larger open position, the available leverage will be lower and therefore the initial margin will be higher.

The maintenance margin is always calculated in the same way, it does not depend on the size of the applied leverage. Maintenance margin is based on notional value levels of an open position. To provide users with the best trading experience, Binance offers maintenance margins of less than half of the initial one.

Liquidation

Liquidation is perhaps the scariest term in futures trading; something that everyone should avoid. In the context of futures trading, liquidation refers to the forced sale of losing positions in order to prevent the balance from going negative. Liquidation occurs when the trader is unable to meet the maintenance margin requirements for a leveraged position.

Liquidation is slow or fast depending on the amount of leverage in the transaction. So with a small leverage, liquidation will not occur if there is a slight correction in the market. Conversely, high leverage can quickly drain traders’ initial investment.

Insurance funds

Insurance funds are airbags that protect traders from unwanted losses, when in some cases they may lose more than they have. Insurance funds are used to prevent “socialized losses” – a situation where the income of profitable traders is used to cover the losses of insolvent traders.

By trading on an exchange that has a large-cap insurance fund, traders do not need to worry about socialized losses as the exchange will be liable for the scarcity. Binance operates several insurance funds to ensure that there is sufficient coverage for losses in the event of spikes in volume. Binance uses insurance funds to take on bankruptcy positions while unloading them into the market at a calculated rate.

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