As the popularity of cryptocurrencies increased, futures contracts were developed to offer greater liquidity and resources for traders who are actively involved in the market. Cryptocurrency Futures allow for easy speculation on future price changes using significant leverage. Nevertheless, the futures market requires knowledge of different trading tactics to reduce risks and optimize gains.
In this article, we'll explore the concept of cryptocurrency futures and various strategies that can help you when trading them.
What are crypto futures?
Futures refer to an agreement between two individuals to purchase a commodity, such as cryptocurrencies, at a predetermined price in the future. Traders often use this tool to protect themselves from potential fluctuations in the market.
A Bitcoin miner may seek to secure a future price in order to safeguard their financial stability. The trader who purchases the contract stands to reap handsome rewards should the value of Bitcoin surpass the initial purchase price. Conversely, if the price plummets, the trader is left with a loss, while the miner remains shielded from the market's unpredictable fluctuations.
What’s a perpetual futures contract?
Perpetual futures contracts were introduced to cater to the round-the-clock trading of cryptocurrencies. Unlike regular futures contracts, these contracts don't have any specific end date. Traders can use them to take advantage of cryptocurrency price changes with significant leverage without actually owning the cryptocurrency itself.
To maintain equilibrium between the perpetual futures contract and the spot price of an asset, a funding rate is enforced. If the futures exchange reflects a higher value than the spot price, an interest is levied upon long position holders, dissuading them from inflating the price. Similarly, this same interest is paid out to short position holders, incentivizing them to engage in shorting. This dynamic mechanism effectively drives the market towards self-correction, making sure the continuous viability of the futures contract.
Where to trade crypto futures?
OKX Futures is a robust and fluid futures platform that boasts an impressive leverage of up to 100 times. Traders can confidently engage in trading an extensive selection of over 100 cryptocurrency futures while gaining access to a comprehensive collection of powerful tools that make executing trades seamless and efficient. Moreover, OKX Futures offers a built-in support system for automated trading through bots, allowing traders to automate their trades according to their personalized rules and strategies.
How to trade crypto futures?
Perpetual futures are the most popular type of crypto futures, and OKX is the best place to trade them. Here’s a quick guide on getting started with OKX Futures:
Step 1: Sign up to OKX
Step 2: Head over to Trade and select “Futures.”
Step 3: Select the cryptocurrency you want to trade.
Step 4: Type in your position size and set the leverage.
Step 5: Don't forget to close your position. You can set stop-loss and take profit levels if you want to.
If you want more detailed instructions, check out our step-by-step guide on how to trade perpetual futures on OKX.
Best crypto futures trading strategies
When engaging in futures trading, you don't own the underlying asset and are restricted from maintaining an open position for an indefinite period. As such, it's crucial to devise a comprehensive trading strategy before executing any trades. Here are several strategies to help you trade cryptocurrency futures:
Risk management
With futures, you’re speculating on the price of a cryptocurrency at a particular point in the future. Often, most trades are also placed with leverage. Therefore, it's important to manage your risks. Ideally, you should have an exit plan while placing a futures trade.
With the volatile nature of cryptocurrencies, make use of stop losses to make sure you don't risk more than what you’re comfortable with. Leverage allows traders to open larger positions, amplifying gains. But, the same is also true for losses. Therefore, it's important to use leverage with caution.
Trade both ways
As a futures trader, your main goal isn't to hold the underlying asset. Instead, you're solely interested in speculating on its future price. This means you aren't restricted to making gains solely from the asset's value increasing, but can also reap rewards from its price falling.
Make use of both longs and shorts to grow your earnings. They can also be used for hedging, to offset potential losses in the spot market.
Follow the trend
Resist the urge to battle against the market's natural flow. Instead, employ sophisticated indicators such as the Relative Strength Indicator (RSI) to accurately analyze market trends. When the market is bullish, opening a short position would be unwise. Embracing trends is one of the most straightforward methods for making gains in futures trading.
Patience
Exercising patience is important when engaging in the volatile space of futures trading. A single poor trade has the potential to yield substantial losses, making it crucial to proceed with caution and precision. Choosing not to trade is acceptable, as the market is ever-evolving and presents endless possibilities. It's wise to bide your time and wait for the ideal price movement that aligns with your carefully crafted trading strategy.
Scalping
Scalping is a tactical approach to swiftly entering and exiting trades, aiming to generate gains in a brief timeframe, often within mere seconds. The gains on individual trades may not be substantial. However, the compounding effect of executing many such trades with leverage can ultimately result in considerable returns.
Swing trading
In contrast to the fast-paced strategies of day trading and scalping, swing trading involves maintaining a position for a prolonged period, typically spanning several days or weeks. This approach enables traders to take advantage of substantial, enduring price fluctuations. However, this approach demands both fortitude and financial resources.
Even if the trade is initially favorable, it may take several days to materialize fully. Given the unpredictable nature of the market, the asset in question may also undergo sudden and drastic swings. When employing leverage, it's important to make sure you have sufficient liquidity to sustain the trade.
News-based trading
This strategy involves trading based on the news around the asset. If the news is well-received, it could result in a price increase. The opposite happens following negative news. As a trader, you need to analyze the market sentiment regarding the news. Timing is also important here. If you’re trading based on news that’s already a few days old, the event is likely already priced in.
Staying safe while trading crypto futures
With the volatile nature of the cryptocurrency market and the risks involved with futures market, it's important to stay safe while trading.
Educate yourself
Familiarize yourself with futures and the exchanges where you'll be trading them. Gain a solid understanding of cryptocurrency trading, futures, leverage, funding rates, and other important concepts.
Start small
Reading can only teach you so much. Carry on with your education by getting practical experience. Engage in small trades, but avoid high risks involving large sums of money or leverage.
Use a stop-loss
The use of a stop-loss is crucial for successful trading. Most traders are incapable of enduring a failing trade indefinitely. So, it's imperative to set and stick to a comprehensive exit plan for all futures trades.
Don't over-leverage
Using leverage can exponentially increase your gains, but it can also have the same effect on your losses. Therefore, it's crucial to consider the potential worst-case scenario and approach leverage with caution. By doing so, you can mitigate the risk and maximize your potential gains.
Remain in control of your emotions
While trading, your emotions can get in the way. Meanwhile, fear and greed can cloud your judgment. This could also result in bad, impulsive decisions. That’s why it's important to remain rational at all times, returning to fundamental analysis if needed.
Backtesting strategies
After finalizing your plan, it's wise to verify if the strategy has previously proven successful. While this doesn't guarantee future success, it serves as an additional safeguard.
The final word
Cryptocurrency futures present boundless opportunities for savvy traders who have a deep understanding of the intricacies of the market. By implementing a few carefully considered tactics and formulating a solid plan, you can expertly navigate the volatile landscape of crypto futures. However, achieving success in this market demands both discipline and strong risk management techniques. While it is unrealistic to expect gains from every single trade, it's crucial to glean valuable lessons from any missteps and continually refine your strategies.
