Crypto, which was once largely frowned upon, is seeing more and more entrants recently as investors realize the profit potential contained within this market. However, being a relatively new space, regulators and statutory bodies from around the world are taking crypto with a grain of salt. This has locked out some regulated institutional investors and funds, who otherwise wouldn’t mind exposure to this highly volatile (read profitable) industry. In 2017, the Commodities Futures Trading Commission (CFTC) approved the first crypto futures contract, which meant investors could gain exposure to the space without holding the actual digital assets. This essentially alleviated any compliance concerns.  

About trading futures in crypto

Futures are derivatives contracts with a future settlement date. This means that traders deal in these contracts, as opposed to the actual cryptocurrency. These contracts speculate that the price of a crypto coin will rise or fall by a certain date in the future. If an investor speculates the coin will rally, they take up a long position on the contract. If they expect its price to fall, they take a short position. 

It is important to note that these contracts heavily utilize leverage. This means that investors only have to put up a fraction of the contract’s value while their broker lends them the remainder. Since they can open large positions using this leverage, this could greatly amplify their profits, as well as losses. For that reason, caution is always vital when trading these derivatives.

Why trade crypto futures?

Thanks to leverage, trading these contracts is capable of bringing in large profits from a single successful trade. This way, these contracts can be used to grow a trader’s portfolio significantly. Further, they could also be used as a hedge against risk by traders who have large positions open in a cryptocurrency. For instance, if they hold a large amount of Bitcoin, they could take up a short position on a BTC futures contract using leverage. This way, any losses from a downturn in the coin’s price can be offset by the profits from the futures trade.    

How to trade crypto futures – a step by step guide

Step I: Create a trading methodology

Most novice traders attempt to recreate strategies they saw online or those used by their friends. While this could have some measure of success, it is not always the most efficient approach. Usually, an ideal trading methodology should be suited to your own financial goals, risk appetite, and personality.

Therefore, to create one:

  • Find out what your trading personality is
  • Establish how much risk you’re willing to take, as well as your long-term goals
  • Define parameters matching your personality
  • Evaluate the performance of each of these parameters
  • Adjust the parameters appropriately to deal with any pain points discovered

Step II: Create a trading plan

The difference between a trading methodology and a trading plan lies in the details. The latter is much more detailed, as it is designed to help fine-tune your risk management and ensure you’re consistent with your trading. It entails specifics such as when and how to enter and exit positions, the indicators to consider, the position size to trade with, as well as the location of stop-loss orders. 

Once all this is broken down, it has the advantage of reducing the risk of emotional trading. It also helps capitalize on more opportunities throughout the day as you tend to look for specific setups rather than trade arbitrarily.

Step III: Managing risk

This is where you set limits on how much you’re willing to lose on every single trade. Recall that we established futures trading relies on leverage. Therefore, even small market movements in the wrong direction could put you hundreds, if not thousands of dollars in loss. Therefore, when managing your risk, you should treat each dollar as if it were worth 100 times its actual value. If you’re using a 1:50 leverage, then each dollar will be worth $50.   

Therefore, use tight stop-losses, and aim for small profits per trade. This conservative approach will help you make substantial profits in the long run while cutting your losses before they run high. 

Step IV: Responsible trading

Emotional trading is one of the main reasons traders end up making irrecoverable losses. Trading compulsively is akin to gambling and should be avoided at all costs. Instead, one should be objective with their trading decisions and only trade setups that are qualified by their trading plan. Other advisable measures include reducing leverage, reducing the frequency of trades, and using smaller position sizes. As a rule of thumb, never trade with more money than you can afford to lose.

Step V: Continuous education

As aforementioned, the cryptocurrency space is relatively new, and as with all technology, it is constantly evolving. Investors should keep themselves abreast with any happenings in the blockchain world, such as countries banning crypto or new derivatives contracts being approved. This is because fundamental news, such as major updates to a blockchain, may significantly impact a token’s price. Therefore, it is important to keep up to date with market trends and other relevant news, as they can provide insight into how best to trade these digital assets.

In conclusion

Futures are derivatives contracts that allow one to speculate on the future price of a cryptocurrency. This way, one can benefit from its price movements without holding the actual digital asset. These contracts often utilize leverage, which can substantially amplify one’s profits as well as losses. For that reason, they are often used to grow portfolios or to hedge against risk. However, due to the increased risk of loss, one should exercise caution when trading this financial instrument. Traders should also avoid emotional trading and overleveraging and use tight risk management measures.

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