Futures Trading Guide
What is Futures Trading?
Futures trading is a derivative instrument that allows traders to trade contracts of an asset. The use of contracts differs from spot trading where the underlying asset is exchanged between buyers and sellers. In crypto, the most common form of futures contract is “perpetual” where the contract does not have an expiry date and can be theoretically be held with no time limit.
Benefits of Trading Futures
Trading perpetual futures provides the ability to utilise leverage. This allows you to increase your position size enabling you to use your capital more efficiently. When spot trading, It would require you to possess $10,000 total capital if you wanted to open 10 x $1,000 positions. When trading futures and using 10x leverage, you could open the same 10 x $1,000 Positions with only $1,000 total capital and $100 per position.
Ability to Short
Another opportunity is the ability to short coins without having to buy the asset itself. Having the ability to short is crucial if you want to be a successful trader, and having this ability means you can effectively profit regardless of what direction the market is trending.
Futures also enables you to hedge your portfolio through longing or shorting. The purpose of hedging is to offset any potential losses or gains. This allows your portfolio to be balanced to perform well in all market conditions and to take advantage of any upside / downside moves without needing spot exposure to the asset.
An example of where hedging can be beneficial, is if you had a position of 1 BTC in your spot holdings. During times of uncertainty where you are not sure what way the market may trend or you are expecting some potential downside, you could open a short of 1 BTC. This would offset any losses incurred from holding your spot position and provide extra capital to acquire BTC at a lower price.
As the example above illustrates, you would’ve profited over 40% by opening a short in the region of $56,000 and closing it at $33,000. This trade would’ve net you a profit of $22,400 and offset the vast majority of the loss incurred from holding your spot position.
This also means that you can maintain your spot exposure and is especially useful if you have your holdings in cold storage where they are not easily accessible.
What is Leverage?
Leverage gives you the capability increase your position size by borrowing against your capital. This can result in profits and losses being amplified.
Leverage allows a trader to use their capital more efficiently as they can open more positions of the same size when compared to spot trading. When spot trading, It would require you to possess $10,000 total capital if you wanted to open 10 x $1,000 positions. When trading futures and using 10x leverage, you could open the same 10 x $1,000 Positions with only $1,000 total capital and $100 per position. Your margin of $100 for each trade becomes $1,000 with 10x leverage.
If you have a $1,000 position ($100 Margin and 10x leverage) and price increases by 10% from your entry price you will profit $100. However, if the trade goes the other way and price decreases by 10% from your entry price you will lose $100 and will be liquidated.
It is crucial that all traders who utilise leverage manage their risk correctly and always understand the sizing of their positions.
Setting Margin Mode and Leverage
There are two different margin modes you can select, “cross” or “isolated”. “Cross” will result in all your trades sharing the same margin. This will result in your liquidation level being lower compared to “Isolated”, however, you run the risk of losing all your trading account capital if your liquidation level is reached.
“Isolated” results in each trade’s margin being isolated and only enables this amount to be lost if your liquidation level is reached. Your liquidation level will be higher than “cross”, but only the margin you have allocated for each trade is at risk.
Margin mode and leverage setting.
On futures, Coinrule allows you to trade one coin per rule. This is to prevent your rule opening trades on several different coins and drastically increasing your exposure to the market when using leverage.
Note : The margin mode and leverage is individually set for each coin. The default setting on every coin is “cross” and 20x leverage.
How to Setup a Rule on Binance Futures
This article describes how to connect your Coinrule account to Binance Futures.
When using Binance Futures, your rules will only place limit orders. Limit orders are orders that you place on the order book, with a specific limit price. When placing a limit order, the trade is executed when the market price reaches the limit price set or higher.
When using Coinrule, the limit price selected is the price at the moment conditions have been met, plus the safety margin that was chosen from the settings page as shown below.
Price margin selection for limit orders.
An example of this is if you have an order where the price condition for execution is at $100, if the safety range is 0.5%, the limit price is $100.5. If the safety range that is selected is 0, the limit price will be the same as the price triggered. Setting up a safety range helps ensure a maximum number of executions.
Margin, Position Size and Contracts
When trading futures, a contract is 1 unit of the asset you are choosing to trade. It can also be thought as the current price of the asset. For example, 1 contract of Ethereum is a single coin and is worth $2,000 (at current market price).
The value of number of contracts you trade is also know as your position size. Your position size consists of your margin multiplied by the leverage you are using.
Position Size = Margin * Leverage
Alternatively, you can calculate your position size by multiplying the price of the contract when you opened the position by the number of contracts you are trading.
Position Size = Price * Number of Contracts
Your exchange uses your capital (margin) as collateral and lends you funds against this initial amount. The amount you borrow is determined by the amount of leverage you are using.
You can calculate the amount of margin required by using this formula :
Margin = Position Size ($ Value of Contracts you are Trading) / Amount of Leverage
As a safety feature Coinrule only allows you to trade one contract per rule. This is to prevent your rule opening multiple trades on multiple coins resulting in you having substantial exposure to the market.
Another safety feature is that you can only be long or short on a coin. If you try to run a shorting rule on a coin that you are already long, you will receive the error message “Reduce Only” and the Rule will not operate.