Futures trading allows traders to speculate on the price movement of an asset without owning it directly. Unlike spot trading, where assets like Bitcoin or Ethereum are purchased and held, futures trading involves contracts that derive value from the underlying asset. This article covers the benefits, risks, and essential concepts you need to understand when trading futures with leverage.
Understanding Futures Contracts
In futures trading, you trade contracts instead of the actual tokens. A futures contract might appear as MATICUSDT/USDT in the 3Commas UI or USDT_MATICUSDT in notifications, but it doesn’t represent ownership of MATIC tokens. Instead, it’s a contract that tracks MATIC’s price against USDT. The cost of one contract can vary from one trading pair to another, and contracts can only be traded in whole units.
Example:
MATICUSDT/USDT is a contract. When you trade this, you’re not holding MATIC; you’re speculating on its price movement through the contract.
Benefits of Futures Trading
1. Short Exposure
Futures trading enables you to profit from both upward and downward price movements. With a Long position, you profit if the asset price rises. With a Short position, you profit if the asset price falls, all while holding only stablecoins in your account. This flexibility is especially valuable in volatile markets, where prices fluctuate frequently.
Example: If you believe MATIC’s price will fall, you can open a short position on the MATICUSDT contract. If MATIC’s price drops, you profit from the decline.
2. Leverage
One of the key advantages of futures trading is leverage, which allows you to enter larger positions than your account balance. On Binance, for example, perpetual futures contracts offer leverage up to x125. This means that with $100, you can enter a position worth up to $12,500. However, higher leverage increases both potential profits and potential losses.
Example: With $100 and 10x leverage, you can trade a $1,000 position. If the asset price rises by 1%, you’d gain $10, but if it falls by 1%, you’d lose $10.
⚠️ Important Warning
Leverage amplifies both gains and losses, making leveraged trading inherently risky. A small price movement against your position could lead to liquidation, meaning you’d lose your entire position. Always use a Stop Loss to help mitigate this risk.
3. Hedging & Risk Management
Futures trading was originally designed for hedging—protecting investments from adverse price movements. By holding a long-term spot position in one asset and using futures contracts to take an opposite position, you can reduce the risk of price fluctuations.
Example: Let’s say you hold $9,000 in Bitcoin as a long-term investment. To hedge against a potential drop in Bitcoin’s price, you could use the remaining $1,000 in your account to open a short position on Bitcoin futures with 10x leverage, providing $10,000 of effective short exposure. This setup offsets some of the potential losses if Bitcoin’s price drops.
🔔 Note
This article is not a comprehensive guide on hedging techniques. Consider further research or consulting financial experts before implementing hedging strategies.
Perpetual vs. Expiry Contracts
Not all futures contracts are the same. Futures contracts generally fall into two categories:
Perpetual Contracts: These have no expiry date, allowing you to hold a position as long as you can cover the funding charges. Funding charges are typically applied every 8 hours and are based on the demand for long versus short positions.
Expiry Contracts: These contracts have a specific expiration date. For instance, BTCUSDT_250331/USDT indicates a contract that expires on March 31, 2025. Once a contract reaches its expiry date, any open positions are closed automatically, and the contract is settled.
Example: Expiry contracts are often used by traders who have a specific timeline in mind, while perpetual contracts offer more flexibility for long-term trades.
Fees and Funding Charges
When trading futures with leverage, it’s essential to consider both trading fees and funding charges.
Trading Fees:
Futures fees are usually calculated as a percentage of the entire position size. For example, if you open a $1,000 position with only $100 of your own funds using 10x leverage, the fee is based on the full $1,000 position, not just your initial $100 investment.
Funding Charges:
Funding charges occur every 8 hours and are determined by the number of traders in long versus short positions. The funding rate is designed to keep the contract price close to the underlying asset price. If you hold a position when funding fees are due, you either pay or receive funding based on whether you’re long or short and the current funding rate.
Example: If the funding rate is positive, long positions pay short positions. If it’s negative, short positions pay long positions. These charges can accumulate, so it’s essential to monitor them when holding positions for extended periods.
Important Exchange-Specific Details
When trading futures, understanding the specific rules of your exchange is essential:
Minimum and Maximum Position Sizes: Each exchange has different limits for position sizes, so make sure to review these to avoid unexpected restrictions.
Margin Calls and Liquidation: Exchanges manage margin calls differently, so know when a margin call will be triggered and how it might affect your position.
Stop Loss and Take Profit Options: Configure these risk management tools to help control potential losses and lock in gains.
Tips for Successful Futures Trading
Start with Lower Leverage: Especially if you’re new to futures trading, start with lower leverage levels (e.g., 5x or less) to manage risk.
Use Stop Loss and Take Profit Levels: These tools help protect your position from drastic price movements and lock in profits automatically.
Monitor Funding Fees: Keep an eye on funding fees, especially if you hold a position for a long time. Funding fees can add up, impacting your overall profitability.
Avoid Emotional Trading: Futures trading can be highly volatile. Have a plan, follow it, and avoid emotional reactions to market movements.
Final Note
Futures and leverage trading provide powerful tools for increasing potential profits and managing risk, but they also come with significant risks. Make sure to understand how each aspect of futures trading works, and always prioritize risk management to protect your account.