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2 months ago

How to Start Crypto Futures Trading


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Why crypto futures trading? Briefly, futures allow you to hedge portfolio risk and increase profit potential through the use of leverage. To start trading crypto futures, you can follow the seven simple steps described in this article, from opening an account to closing your first position.


Contents

How to trade cryptocurrency futures

To capitalize on the crypto market’s volatility, seasoned investors use crypto futures, a financial instrument that helps hedge your portfolio (mitigate risk). If you are not sure what crypto futures trading is, consider reading more at 3commas Academy. 

Here are the basic steps to successfully begin your crypto futures trading journey, using Binance.com as an example. (Except Binance US, you can’t trade futures on Binance in the United States).

Step 1. Sign up for a free Binance account

Click Open Now to get started.

creating a Binance crypto futures account

Binance requires you to take a short quiz to make sure you’re ready to trade futures. If you don’t pass the test, you'll have to refresh your knowledge and retake it. Until then, you won't be able to trade futures. This way, the system protects newbies from losses.

You’ll need to answer 14 questions to pass the quiz. Here is what the questions might look like:

1. Which of these is not the key difference between USDT-margined futures and coin-margined futures?

  • Types of collateral
  • Size unit 
  • Leverage level

2. What can the maximum loss for trading in a futures contract be?

  • 100% of collateral
  • 30% of collateral
  • 50% of collateral

Some questions feature clickable hints. Check them out if you want to learn more and pass the quiz. 

If you’re not sure that you can pass the quiz, consider reviewing the tutorial section. Once you’ve answered the questions, it’s time to choose your first contract.

Step 2. Choose a contract you want to trade

choose a contract Binance

There are USDT-M Futures and Coin-M Futures available.  

  1. USDT-M Futures are USDT-margined futures that use stablecoin like USDT as a collateral. Profit & Loss (PnL) is denominated in USDT.
  2. Coin-M Futures are coin-margined futures that use base assets as collateral. For instance, BTC-USD Quarterly 1120 (November 20th) futures use BTC as collateral. PnL is denominated in BTC.

Step 3. Getting started 

You have to select a futures trading mode to get started. To adjust the position mode, click the More icon (3 dots):

Position mode on Binance

Currently, two futures trading modes are available: 

  • One-way mode
  • Hedge mode

Choose one of the trading modes and continue.

futures trading modes

Then, set the margin mode and leverage multiplier.

margin mode Binance

 There is a Cross mode and an Isolated mode available.

cross and isolated margin modes on Binance

Cross margin mode: Share your margin balance across all open positions to avoid liquidation. You risk losing your entire margin amount, as well as any active trades if your account is liquidated.

Isolated Margin Mode: Manage your risk on individual positions by restricting the amount of margin allocated to each. When a position's margin ratio reaches 100 percent, the trade is liquidated.

Now, let’s set up the leverage.

You can manually adjust the leverage. The maximum amount of leverage available depends on the notional value of your position.

leverage multiplier on Binance

At this point, it’s crucial to manage the risks properly: the higher the leverage, the higher the risk. Some traders consider a 1:5, 1:10, or 1:20 ratio optimal. For example, 1 to 5 leverage means that having a deposit of $100 you can make a deal with a lot of $500; For 1:10 and 1:20 leverage the deal’s size is $1,000 or $2,000 respectively. Leverage higher than 1:20 might be an excessive risk for most newbies.

futures leverage on Binance

Step 4. Transfer assets into your Futures account.

If you want to trade USDT-M Futures, you can transfer assets from Spot Wallet into a USDT-M account.  For detailed information about wallets, check out how to use a crypto wallet at 3commas Academy.

USDTM Futures on Binance

Alternatively, you can transfer into a Coin-M account if you want to trade Coin-M Futures.

CoinM Futures Binance

Step 5. Open a position.

Binance supports different order types, for example, stop limit, stop market, trailing stop, etc.

place order on Binance

You can find more details by hovering over the Information tab and going to Guide.

Information on Binance

By selecting the Buy/Long position, you can, for example, buy 1 BTC. The initial margin cost is indicated at the bottom part of the picture.

Place order on Binance

You can upskill your trading and earn more by exploring advanced settings such as TP/SL and Reduce-only. 

Take Profit (TP) is an order to automatically close the deal with profit when the price level is reached. This order is typically placed when the trader continuously monitors the open trade or expects a substantial price change.

A Stop Loss (SL) is a command to the exchange to close a deal after a specific threshold of price loss has been reached. For instance, let's say you want to acquire an asset for $50. The asset's price might increase or lose its value, resulting in a negative balance, such as -$35. If you don't want to lose more than $7 on a transaction, you may set a Stop Loss, which is the price level at which the deal will be immediately canceled, ensuring that you only lose the minimal amount.

buy futures on Binance

The picture below shows what the Take Profit/Stop Loss window might look like:

BTCUSDT futures on Binance

Step 6. Monitor your position 

All your positions are listed at the bottom part of the website. You can check each position’s estimated liquidation price, margin ratio, and potential profit & loss.

position futures on Binance

Margin ratio and asset details are placed on the right side, where you can track them to evaluate the risk in no time. You can then choose to either close the position or add a margin to reduce the liquidation risk.

margin ratio on Binance

Step 7. Close your position  

You can close your position by selecting Limit Close or Market Close directly in the position section.

market close on Binance

Alternatively, you can use the place order section. Remember to check Reduce-Only under One-way Mode.

reduce-only on Binance

Under Hedge Mode, switch to the Close tab.

close tab on Binance

General crypto futures trading tips 

  • One of the most valuable recommendations for risk management is that you should never invest more than you're ready to lose. 
  • Never trade on borrowed money (like credit cards) unless it’s margin trading.
  • Make sure to learn futures trading: find the right entry points, manage the leverage ratio, and monitor your open positions.
  • Choose a reliable platform to trade futures. Reputation is a crucial factor when choosing a crypto exchange such as Kraken, Bybit, FTX, and more.
  • If you use leverage, you should check the position’s margin, which fluctuates with the price. If it falls below a certain threshold, your position will be liquidated, and you will incur a loss.

Have you ever wondered what's the difference between manual and algo trading? Search no more: check out 3commas Academy to get a comprehensive answer.

Before you start crypto futures trading

Despite the similarities, futures trading is not the same as ordinary trading. Here are a few essential factors to consider:

Market volatility

The high volatility of cryptocurrencies and related futures is essential to be aware of while trading them. While this is generally considered by many to be a risk, at the same time it provides a great deal of opportunity. This is especially important for short-term traders who prefer to speculate on rapid price shifts. Cryptocurrencies are still a tiny market compared to forex or stocks. As a result, digital assets are vulnerable to dramatic swings due to whales or other industry-related events.

Leverage trading

Leverage is an essential feature of margin trading that most futures trading platforms offer. While crypto exchanges typically feature leverage up to 50x, Binance provides leverage up to 125x. Trading with high leverage can potentially yield high profits for advanced traders, but there is still a risk that the position will be liquidated.

When trading futures, beginners should avoid investing with high leverage, but a minimal level may help. The leverage chosen determines the margin required to trade. For example, if a trader chooses 10x leverage, then 10% of his funds will be involved in the position, and the rest will be borrowed from the exchange. 

Hedging

Crypto futures trading is an excellent hedging method against traditional assets or the possibility of a sharp drop in the cryptocurrency itself. Bitcoin futures trading is not subject to extreme losses in the price of BTC on the spot market because the futures contract has a predetermined price on the expiration date.

Diversification

In addition to hedging, crypto futures allow you to diversify your capital. It's no secret that diversification is one of the best money management methods available to traders and investors. You can open several positions in Bitcoin (BTC), Ethereum (ETH), Chainlink (LINK), and many other coins/tokens to create a well-diversified portfolio consisting of futures contracts. This way, you can reduce the risk of problems with one asset that may unexpectedly fall in price.

Liquidity assessment

There are three primary criteria for assessing liquidity while trading futures: asset liquidity, exchange liquidity, and market liquidity. A trader should always examine if there are enough buyers, sellers, makers, and takers, as well as the asset's and market's overall health.

Because most futures contracts are structured through cash settlement, most crypto futures marketplaces have more liquidity than spot exchanges. Price drops are significantly less likely when there is enough liquidity. But the fundamentals must always be met to reduce risk.

End date

Let's say you're a bitcoin futures trader who prefers to settle with cash. The expiration date is essential in this situation since you receive your cash or stablecoins when the contract is settled. You may, however, sell your open futures contract at any moment before it expires, locking in a profit or loss based on spot price movements.

FAQ

Should I trade crypto futures?

Anyone interested in trading cryptocurrencies can start by trading futures. This financial tool is especially suitable for those who want to start using cryptocurrency without actually keeping it in digital wallets or worrying about its security. However, futures trading isn’t recommended for newbies.

Is crypto futures trading profitable?

Cryptocurrency futures trading can be very profitable if you manage your risks properly. For regular traders, this activity can be more beneficial than bitcoin mining or regular trading. But like any other form of trading, there are significant risks that should not be ignored.

How can I get started with crypto futures trading?

You need an exchange to start futures trading. Select a reliable exchange and open up an account. Once you fund your account, you can trade crypto futures.