Futures trading is one of the most popular methods for generating profits in the cryptocurrency market. These trades, often executed using strategies like scalping, are particularly attractive to professional traders. In the crypto market, a special type of futures trading known as Perpetual Futures exists, which differs from traditional futures contracts.
In traditional futures contracts, traders must specify both the direction of the trade and the contract's expiration date. However, in Perpetual Futures, there is no expiration date, allowing traders to hold their positions indefinitely without concerns about contract expiry.
Despite the appeal of futures trading, it is crucial to be mindful of the market’s high volatility and the use of leverage (Leverage). This financial tool can significantly amplify both profits and losses, making it essential for traders to have a strong grasp of technical analysis and risk management.
In the following sections, we will provide a comprehensive guide to the futures market, covering all aspects to help you prepare for entering this field.
What Is Futures Trading?
Futures trading refers to a type of derivative contract, where a specific asset is traded at a predetermined price on a set future date. The agreed-upon price is known as the Futures Price, and the scheduled date for asset delivery is referred to as the Settlement Date. The value of these assets is typically determined based on Futures Indices.
Futures contracts are generally divided into two main types:
1. Standard Futures Contracts
These contracts function similarly to CFD (Contract for Difference) trading, where traders speculate on the market’s direction without actually owning the underlying asset. If their prediction is correct, their profit is calculated based on the leverage (Leverage) and margin (Futures Margin) used in the trade.
One of the most common forms of futures contracts in the cryptocurrency market is Perpetual Futures. Unlike traditional contracts, these have no expiration date, allowing traders to hold their positions as long as they desire. Most futures trading in cryptocurrency exchanges falls under this category.
2. Physical Futures Contracts (Futures Agreements)
In this type of contract, the underlying asset is physically delivered to the buyer upon the contract’s expiration.
Types of Positions in Futures Trading
In futures trading, positions are generally classified into two categories:
Long (Buy Position): A long position is taken when a trader anticipates that the price of an asset will increase.
Short (Sell Position): A short position is taken when a trader expects the price of an asset to decrease.
Markets Suitable for Futures Trading
Futures trading can be conducted in any market where assets are bought and sold. Some of the most popular markets for futures trading include:
Commodities Market: Includes raw materials such as metals (gold, silver), energy (oil, gas), and other essential goods.
Forex Market: Involves trading national currencies against each other, such as EUR/USD (Euro to US Dollar).
Cryptocurrency Market: Includes assets such as Bitcoin (BTC), Ethereum (ETH), and other digital currencies.
Stock Market and Equity Indices: Includes stock market indices like S&P 500 and Dow Jones, which represent a combination of multiple company stocks.
Characteristics of an Ideal Market for Futures Trading
Predictable Volatility:
Markets with logical price fluctuations and clear patterns are more suitable for futures trading. Unpredictable and irrational volatility can increase risk and the likelihood of liquidation.
High Liquidity:
Liquidity refers to the presence of active buyers and sellers in the market at all times. High liquidity ensures that traders can execute their trades at fair prices under any market conditions. Additionally, it helps reduce the bid-ask spread (the difference between buying and selling prices).
Examples of Suitable and Unsuitable Markets
Cryptocurrency Market: Bitcoin and Ethereum are ideal for futures trading due to their more predictable price behavior and high liquidity. In contrast, meme coins tend to experience extreme volatility, making them highly risky for perpetual contracts.
Forex Market: Major currency pairs like EUR/USD or GBP/USD exhibit logical volatility, making them ideal for futures trading. However, exotic currency pairs related to less-developed countries often have unpredictable movements and low liquidity, making them less suitable.
Commodities Market: Assets such as gold and oil are among the best options for futures trading because of their high liquidity and predictable price trends.
Stock Market: Stock indices like S&P 500 and Dow Jones are excellent choices for futures trading. Since these indices comprise multiple companies, they tend to have more balanced volatility and high liquidity.
Choosing the right market for futures trading significantly impacts your risk exposure and overall success. Therefore, conducting a thorough market analysis before entering this field is essential.
Why Trade in the Futures Market?
Before exploring the advantages and disadvantages of futures trading, let’s examine the key reasons traders are drawn to this market:
High Returns with Proper Trading Strategies
Futures trading offers the potential for substantial profits if traders effectively manage risk and employ sound strategies.
Profitability in Both Bull and Bear Markets
Unlike traditional spot trading, futures trading allows traders to profit from both rising and falling markets:
Wide Range of Tradable Assets
Futures traders have access to a diverse selection of
assets, including:
Forex currency pairs (e.g., EUR/USD)
Stocks of major companies
Cryptocurrencies such as Bitcoin and Ethereum
Stock indices like S&P 500 and Dow Jones
Commodities such as gold and oil
Leverage (Leverage) for Higher Potential Profits
Trading with leverage enables traders to control larger positions with smaller capital, potentially amplifying their profits. However, it also increases risk exposure.
High Liquidity and Significant Trading Volume
The futures market benefits from high liquidity, ensuring that buyers and sellers are always available. As a result, transactions are executed quickly with minimal price slippage and narrow bid-ask spreads.
Types of Futures Trading and Their Applications
Futures trading can be categorized into two main types based on contract expiration: contracts with an expiry date and contracts without an expiry date. You might wonder how futures trading can exist without a set expiration date when futures contracts are typically time-bound. The answer lies in the distinction between these two contract types.
Futures Contracts with an Expiry Date
As the name suggests, these contracts have a predetermined execution date. At the time of entering the trade, both parties agree on a specific expiration date. Once this date arrives, both sides are obligated to fulfill their commitments, regardless of market fluctuations. Most traditional futures contracts fall into this category.
Perpetual Futures Contracts (Futures Without an Expiry Date)
In this type of futures trading, there is no fixed expiration date for the contract. As a result, traders can hold their positions for as long as they wish—whether for just a few seconds or several months! This flexibility has made perpetual contracts highly popular in financial markets, particularly in the cryptocurrency sector. However, maintaining these positions may incur funding fees that vary based on the duration of the trade.
Applications of Futures Trading
Futures trading plays a crucial role in market-making and risk management, with different traders utilizing it based on their strategies.
Hedging Risk for Investors
Futures contracts help investors mitigate the risk of
price fluctuations. The two key benefits of futures contracts for hedgers
include:
The ability to secure a buyer or seller in the future at a predetermined
price.
Early access to liquidity, as both parties are contractually obligated to complete the trade.
Speculation for Profiting from Market Volatility
Futures trading is highly attractive to speculators, as it allows them to profit from price fluctuations without needing to own the underlying asset. In this approach, traders capitalize on price movements without concerns about physical delivery of the asset.
Traders and Increased Trading Power
Both professional and retail traders actively participate in the futures market daily. The two primary reasons why futures trading is appealing to traders are:
Leverage for Enhancing Trading Power
Leverage allows traders to control larger positions with smaller capital.
However, this feature magnifies both profits and losses, requiring
effective risk management.
Ability to Profit from Bear Markets
Unlike traditional markets, where profits are typically generated only in bullish
trends, futures trading enables traders to profit in downtrends as
well. By opening a short position, traders can gain from the declining
price of an asset.
Settlement Methods in Futures Trading
Futures contracts are settled in two different ways: physical delivery and cash settlement.
Physical Delivery: In this method, the underlying asset is transferred between the two parties on the specified date mentioned in the contract.
Cash Settlement: Instead of delivering the asset, the difference between the contract price and the market price at settlement is calculated, and the equivalent amount (usually in USD) is paid to one of the parties.
In futures contracts, along with the settlement method, the exact location and time of settlement are predetermined, and both parties are obligated to comply with these conditions.
How to Calculate Profit and Loss in Futures Trading
To determine profit or loss (PnL) in futures trading, three key factors must be considered:
Position Size:
The trade volume is determined based on the invested capital and the leverage
used. For example, if you trade with $100 and use 10x leverage, your
position size will be $1,000.
Price Change Percentage:
The difference between the entry and exit price determines the percentage
change, which directly impacts your profit or loss.
Trading Fees:
Each exchange charges a specific fee for transactions. This fee usually depends
on the duration of the trade and the type of position (Maker or Taker).
PnL Calculation Formula:
PnL=(PriceChange×PositionSize)−TradingFeesPnL = (Price Change \times Position Size) - Trading Fees
Example of Profit and Loss Calculation in Futures Trading
Assume you have $100 and use 10x leverage, meaning your position size is:
100×10=1000 USD
You open a long position on Bitcoin at $50,000. After some time, the price increases to $51,000, which is a 2% gain.
Your profit would be:
1000×2%=20 USD
If the trading fee is $1, your net profit would be:
20−1=19 USD
Result: You made a net profit of $19 in this trade. However, if the price had dropped 2%, you would have incurred the same amount in losses.
Leverage in Futures Trading
Leverage is a tool that allows traders to use borrowed funds or credit to trade assets with a higher value than their actual balance. This feature increases buying and selling power, enabling traders to open larger positions with less capital.
Leverage is typically expressed in two ways:
As a ratio (e.g., 1:5)
As a multiplier (e.g., 10x)
For example, if your account balance is $100 and you want to open a $1,000 position, you can use 10x leverage (1:10).
Impact of Leverage on Profits and Losses
Leverage amplifies your trades, meaning both profits and losses
increase proportionally.
For instance, if you use 10x leverage and the market moves by 1%, your profit or loss will be 10%.
Caution: While leverage can multiply your profits, it also significantly increases the risk, making proper risk management essential in leveraged trading.
Advantages and Disadvantages of Futures Trading in the Crypto Market
Advantages of Futures Trading
Earning Profit Without Holding Cryptocurrencies
Futures trading allows investors to profit from price fluctuations without
needing to buy or hold cryptocurrencies directly. This feature enables
investors to diversify their portfolios while avoiding risks associated with
storing crypto assets, such as hacking or theft.
Increasing Potential Profit with Leverage
One of the most significant features of futures trading is the ability to use leverage,
which allows traders to open larger positions with less capital. For
example, some exchanges like Bybit offer leverage up to 100x.
This means that if a trader invests only $10 and uses 100x leverage,
their position will be worth $1,000. However, it is essential to note
that while leverage can amplify profits, it also greatly increases
risk.
Profiting in Both Bullish and Bearish Markets (Two-Way
Trading)
Another key advantage of futures trading is two-way trading (Long &
Short positions). This means that traders can benefit from both rising
and falling markets. Even during market downturns, traders can seize
opportunities to earn profits by opening short positions. This
feature makes futures trading attractive, even in bearish market conditions.
Disadvantages of Futures Trading
High Volatility in the Crypto Market
The cryptocurrency market is highly volatile, leading to significant risks.
This volatility can be even more impactful in futures trading, especially when
using high leverage. If traders do not implement proper risk
management, they may suffer substantial losses.
Requires Advanced Knowledge and Experience
Futures trading demands in-depth knowledge and experience in financial
markets. Traders who enter this market without proper understanding may
make costly mistakes and lose their capital. Therefore, adequate
education and skill development are crucial before engaging in futures
trading.
Time Constraints and Expiry Dates in Some Contracts
Some futures contracts have expiration dates, which can create uncertainty
and volatility in the market. As the expiration date approaches, prices may
behave unpredictably, leading to potential missed investment opportunities.
Conclusion:
Futures trading has gained popularity among traders due to advantages such as leverage, profitability from price fluctuations, and not requiring direct ownership of cryptocurrencies. However, it also carries considerable risks, including market volatility, the need for specialized knowledge, and contract expiration dates.
To succeed in futures trading, proper risk management and thorough education are essential before entering this market.
