Introduction
A futures contract allows traders to get involved in the futures market. With it, you agree to buy or sell an underlying asset at a set price on a certain date in the future. This article is a beginner’s guide to it. It will help you understand futures trading strategies & contracts and show you how to get started.
Understanding the basics of futures trading
Futures trading may seem exciting and rather promising. But first, it is important to understand the basics. A futures contract is a legal deal between two people. With its aid, both parties agree to buy or sell an asset—like a commodity, currency, or financial instrument—at a specific price on a future date.
These contracts have set rules about quality, quantity, and delivery location. This makes it easier to trade. Unlike regular trading where you own the underlying asset, futures trading is thus more about guessing how prices will change.
What are futures?
A futures contract is a legal agreement. It makes the buyer agree to buy and the seller agrees to sell a certain amount of something called an underlying asset. They will do this at a set price and on a future date, known as the expiry date. The underlying asset can be different things. This includes commodities like crude oil and gold, as well as financial items like currencies and stock market indices.
The size of the contract is the specific amount of the underlying asset involved, and it can change based on the contract type. For example, one futures contract for crude oil on the CME Group stands for 1,000 barrels of crude oil. It is important to know the main parts of a futures contract—the underlying asset, contract size, expiry date, and the predetermined price.
Read more about it here.
Why trade futures? The advantages for beginners
Futures trading has special benefits that can help beginners in finance:
- Leverage: With futures trading, you can manage a large position using a small amount of money called leverage. This can increase your potential profits. This method is called margin trading. It lets you take bigger positions than your account balance would usually allow.
- Hedging: Futures contracts help reduce possible losses from negative price changes in the cash market. For example, businesses can use commodity futures to set prices for raw materials. This protects them from price changes. Read more here.
- Diversification: The futures market includes many types of assets, like commodities, currencies, and financial products. This gives you many chances to diversify your trading portfolio.
Preparing to trade futures
Before you begin futures trading, it’s important to get ready. You need the right tools and knowledge. Start by opening a futures account with a trustworthy platform like CoinSwitch. Then, choose the right trading pairs based on how much risk you can take and your research on the market.
How to open a CoinSwitch futures account
CoinSwitch is a great place for beginners to start trading futures. It is easy to open a future account with us.
First, you need to create an account and verify it. After you are verified, go to the futures trading section and add money to the account. It’s important to get to know the trading platform, its features, and the types of orders before you start trading. New traders should also try using a demo account. This helps them get practical experience and build confidence without risking the loss of real money.
Selecting your trading pairs for futures trading
Choosing the right trading pairs is very important for success in futures trading. You should carefully research and pick underlying assets that fit your risk level and market view. Start by choosing assets that you know or want to learn more about.
You also need to check how much the asset’s price can change. Assets with a lot of price movement can give bigger profits, but they also bring higher risks. Think about things like market liquidity, news events, and economic signs that might affect futures prices. Spreading your investments across different types of assets can help lower your risks.
A step-by-step guide to starting futures trading
Now that you know the basics of futures and how to prepare, let’s simplify how to start trading in futures into easy steps. First, learn the common terms used in futures trading. This will help you better understand the details of contracts and how the market works.
Step 1: Understanding common futures trading terms
Before you trade, it’s important to know some basic terms used in futures trading. Here are the key terms:
- Futures contract: This is the agreement that binds a buyer and seller to trade an underlying asset at a set price on a specific date.
- Strike price: This is the set price at which the underlying asset will be bought or sold when the contract ends.
- Tick size: This refers to the smallest price change that a futures contract can go through.
- Contract value: You find this by multiplying the contract size by the futures price.
When you understand these terms, you can read market data better. You will also analyze price changes and make smarter trading choices.
Step 2: Exploring CoinSwitch futures trading order types
CoinSwitch has different order types to help you trade smarter. Knowing how these orders work can help you lower your risk and take advantage of market changes:
- Market order: This type of order happens right away at the best price in the market. It helps you get in or out of a trade quickly.
- Limit order: A limit order lets you pick a certain price to buy or sell. It will only happen when the market hits that price.
- Stop-loss order: This order helps you reduce possible losses. It automatically sells your futures contract if the price drops to a set level.
Step 3: Improving risk management on CoinSwitch Futures
Risk management is very important for handling the changing futures market. CoinSwitch gives tools and features to help you manage risk well:
- Margin requirement: Know the initial margin requirement before starting a futures trade. This is the least amount of equity you need in your account to open and keep a position.
- Stop-loss orders: These orders automatically close your position if the market moves against you. This helps limit your potential losses.
- Position sizing: It’s important to figure out the right trade size based on your risk tolerance and account balance. This way, you can avoid a lot of financial risk.
By using these risk management strategies, you can protect your capital and manage market changes better.
Spot trading vs futures trading
Understanding the differences between spot trading and futures trading is important for making smart choices in the financial market. Spot trading means buying or selling an asset right away at the current price. This usually happens quickly, often within a short period. On the other hand, futures trading means agreeing to buy or sell an asset at a set future date for a specific price.
Spot trading is all about owning the asset right now. Futures trading lets you guess and manage risks based on price changes, but you don’t have to handle the physical delivery of the asset. Choosing between these two kinds of trading depends on your goals, how much risk you can take, and your trading plan.
Read More: What Are Crypto Derivatives & Why Are They Essential?
Key differences you need to know
There are some key differences between these forms of trading. Let’s take a moment to understand them better before we proceed.
| Feature | Spot Trading | Futures Trading |
| Price Determination | Current market price | Predetermined price for a future date |
| Settlement | Immediate or within a short timeframe | Future date specified in the contract |
| Ownership | Immediate ownership of the asset | No ownership until the contract’s expiration |
| Purpose | Buying/selling for immediate use | Speculation, hedging, or physical delivery |
Spot trading caters to those looking for immediate ownership or seeking quick profits from short-term price fluctuations. On the other hand, futures trading offers leverage, hedging opportunities, and profit potential based on accurately predicting future price movements.
Making an informed decision: Should you trade futures?
Deciding to trade futures depends on your financial goals, how much risk you can take, and how well you know the market. Trading futures can be good for people who want to use their capital more effectively, protect against losses, or try to profit from short-term price changes.
Still, it’s important to know the risks of trading futures. This includes the chance of losing more money because of leverage and the risk of liquidation.
Before you trade futures, think about how much risk you can handle. Do your research on the market. Understand how contracts work, and it’s wise to talk to financial experts to help you make good choices that match your financial goals.
Advanced concepts in futures trading
As you get more experience in futures trading, it would help to get a grasp of advanced ideas like liquidation. Looking at the benefits of crypto futures can also improve your trading skills. These futures trading strategies can help you handle your risk better and may increase your chances of making a profit.
Navigating liquidation and reducing risks
Liquidation in futures trading happens when your margin balance falls below the requirements set by the exchange. This usually occurs when the market goes against your future position, causing losses that lower your margin. When liquidation happens, your broker will automatically close your position to stop further losses. This can lead to losing your initial margin and possibly more if the market continues to drop.
To avoid or reduce the risk of liquidation, it is important to have good risk management strategies. This includes setting stop-loss orders, diversifying your portfolio, and checking your margin levels. Also, keep learning about market changes and the risks tied to futures trading.
Unpacking the benefits of crypto futures trading
Crypto futures offer unique benefits that many traders find attractive:
- Leverage trading: With crypto futures, traders can increase their potential gains (and losses) using leverage. This boosts their buying power in the market.
- Hedging against volatility: Crypto futures help protect against sharp price changes in the crypto market. This can help investors reduce losses during market swings.
- 24/7 market availability: Crypto markets are open all the time. This means you can trade futures contracts whenever you want, day or night, without worrying about traditional market hours.
Keep in mind, that leverage can increase profits, but it can also lead to bigger losses. So, it’s essential to really understand the market, manage risks well, and think carefully about your money before trading crypto futures.
Financial considerations in futures trading
Understanding all related money matters, like fees and funding rates for futures trading, is important for making smart trading choices. When you know these details, you can lower your trading costs and make better decisions.
Understanding the fees involved in crypto futures trading
When you trade crypto futures, it’s important to know about the different fees connected to your trades and account management. These fees can change depending on the trading platform you use and the amount you trade. Here are some common fees you should know about:
- Trading fees: These fees are charged for each trade you make in the futures market. They usually come as a percentage of the trade’s value.
- Funding rates: Traders either pay or receive this fee based on the difference between the perpetual contract’s price and the price of the underlying asset. This helps keep the perpetual contract price in line with the market.
- Overnight funding fees: If you hold a futures position overnight, you’ll incur these fees. They are based on the size of your position and the current interest rates.
Understanding the fee structure of your trading platform can help lower your trading costs and improve your profits.
Read More: How Much Does it Cost to Trade in Crypto Futures on CoinSwitch?
What is the funding rate in crypto futures trading?
The funding rate is a payment that happens regularly between people who hold long and short positions in perpetual crypto futures trading. This system keeps the price of the perpetual contract close to the spot price of the underlying asset. This helps the contract price stay in line with the actual market value.
The funding rate can go up or down based on open interest, leverage, and market feelings. If the funding rate is positive, then people with long positions pay those with short positions. When the funding rate is negative, it’s the other way around. Watching funding rates can help you understand market feelings, see possible price changes, and know the cost of holding a position for a long time.
Best practices and common pitfalls
Venturing into futures trading means you need to know how to make the most money and deal with the challenges of this fast-changing market. Also, spotting common mistakes can help you steer clear of expensive errors. It’s very important to pick a good trading platform, create a solid trading plan, and use smart risk management methods.
Common mistakes futures traders should avoid
Many mistakes can harm your trading journey. Here are some common ones to avoid:
- Overtrading: If you trade too much without a clear plan, you might make rash choices and lose money.
- Neglecting risk management: If you start trades without stop-loss orders or proper position sizes, you can put your money at serious risk.
- Chasing quick profits: Trying to make fast money by following unstable assets or only looking at short-term price changes can lead to bad trading results.
Keep in mind that focusing on risk management, staying disciplined, and learning about market changes are key to trading well.
Top metrics to monitor when trading in crypto futures
There are some technical analysis indicators and metrics that you can use to gain an edge in your trading journey. In this section, we introduce you to a few of them.
| Metric | Description |
| Open Interest | The total number of outstanding futures contracts indicates market participation and liquidity. |
| Funding Rate | Reflects the cost of holding a futures contract, indicating market sentiment and potential price trends. |
| Volume | Represents the total number of contracts traded within a specific period, signifying market activity. |
| The total number of outstanding futures contracts, indicates market participation and liquidity. | Analyze price charts, trends, and technical indicators to understand potential price direction. |
By tracking these metrics, you can gain insights into market sentiment, identify potential trading opportunities, and make better-informed decisions when trading in crypto futures.
Conclusion
In conclusion, futures trading can be a good way for beginners to make money if they have the right knowledge. It is important to understand the basics, pick the right trading pairs, and manage risks. Getting to know common terms and different order types will help you feel more ready for the market. Always check fees, funding rates, and how liquidation works so you can make smart choices. Stay away from common mistakes and keep an eye on important metrics to improve your trading. With hard work and ongoing learning, futures trading could earn good returns for beginners. Good luck on your trading journey!
FAQs
1. How do I start trading futures as a beginner?
To begin trading futures as a beginner, pick a trading platform. After that, open an account and add money to it. Next, learn about the futures market, different order types, and how to manage risks.
2. What are the key benefits of trading Bitcoin futures?
Bitcoin futures have some important benefits. They can help you make more money with leverage. They also protect you from price ups and downs. Plus, they give you a chance to bet on price changes in the Bitcoin market.
3. Can futures trading be profitable for beginners?
Futures trading can make money, but beginners should be careful. It is important to develop a sound knowledge of the market before you get started. You also need a solid investment plan and strict risk management. These are key to being successful and making a profit.
4. How does liquidation work in futures trading?
Liquidation happens when your margin balance goes below what is needed. This causes an automatic closing of positions. It is meant to lower financial risk, but it often leads to losses for the trader.
