Understanding the Contract in Full

Suggestions for Newbies in Futures Trading

The huge wealth effect of the cryptocurrency trading market has attracted a large influx of investors, and the high returns have made many forget the existence of risks. Unlike the stock market, cryptocurrency trading has no limit on price fluctuations and is a market that can be traded 24 hours a day, which makes extreme rises and falls a norm, coexisting opportunities and risks.

Among them, as a financial derivative, the margin system amplifies the leverage of the contract. Compared to spot trading, the risk coefficient of contracts is higher, but they also offer more attractive returns. However, countless examples have warned us that if you trade solely based on feelings, you will only become a victim in the trading arena. If you want to increase your success rate in Futures Trading, you need to have a set of entry strategies that suit you. Therefore, this article will introduce some highly applicable entry suggestions in three stages: before entry, during entry, and after entry.

Before placing an order: Manage your funds properly

Ensure that the account not only has coins but also USDT, and there should be prepared funds in the OTC to cope with extreme market conditions. The funds in Futures Trading should preferably not exceed 50% of the individual's total funds, and the funds for each trade should ideally not exceed 10% of the Futures Trading account funds. This practice can effectively reduce trading risks, allowing for sufficient funds to operate even in the face of extreme market conditions.

When opening an order:

Control trading frequency: Frequent Futures Trading can not only affect your mindset and lower your trading success rate, but also increase trading costs. The accumulated transaction fees over the long term can also amount to a significant sum.

Set Stop-Loss and Take-Profit: After placing an order successfully, it's important to promptly set your stop-loss and take-profit, especially the use of the stop-loss function. It is difficult to predict the bottom and top of the futures trading market, but with clever stop-loss settings, you can still have remaining capital to enter the market even if your direction is wrong.

Do not easily trust the opinions of others: Some people may doubt themselves when they see the real trades of so-called “trading experts” or hear that their friends are taking positions that are inconsistent with theirs. However, this is not the case; there are no guaranteed winners in the investment market, and even Buffett is no exception. If you are making trades based on your own rational judgment, then there is no need to change them lightly.

After opening a position:

Overcoming Greed: Greed is human nature, but to succeed in Futures Trading, one must learn to exercise restraint. Take profits in a timely manner when in the green, securing your gains. When facing losses, if the loss exceeds 10% of the total position amount, the risk is significant, and it’s advisable to cut losses decisively and adjust your mindset before re-entering the market. Don’t have a mindset of luck; from the painful experiences of countless investors, holding on often leads to even greater losses until liquidation.

Learn to summarize: After completing a trade, we need to summarize. The market is our teacher, whether we profit or lose. Adjust your mindset, promptly summarize the experiences and lessons each trade brings us, and continuously optimize trading strategies to find a strategy that suits your own trading style and techniques, thereby improving the tolerance rate of trading.

Considering the uniqueness of each trader and the different levels of knowledge they possess on a technical level, the above introduction to opening positions is relatively simple, but it is applicable to most people, especially newbies who are just entering the market. Trading is a discipline, and as the saying goes, true knowledge comes from practice. To continue making profits in Futures Trading, one needs to constantly open positions and develop their own trading strategy, replacing unreliable feelings with a strategy.

Things You Need to Know Before Starting Futures Trading

Understand the operation mechanism of Futures Trading

The biggest difference between Futures Trading and spot trading is that Futures Trading can greatly increase users' capital utilization. Spot trading can only gain profits from price increases, while in Futures Trading, regardless of whether the price rises or falls, as long as the direction is correct, profits can be made.

Users can choose two directions in Futures Trading: buy to open long and sell to open short.

Buy Long: User A predicts that the future market price will rise. Assuming the current price of BTC is 40000U, he uses his 4000U to buy 0.1 BTC with 10x leverage. When the price of BTC rises to 45000U, he sells to close the long position and profits from the price difference, referred to as “buy first, sell later.”

Sell Short: User B predicts that the market price will decline in the future. Assuming the current price of BTC is 40000U, he uses his 4000U to buy 0.1 BTC with a 10x leverage and sells it at the original price. When the BTC price drops to 35000U, he buys back to close the position and profits from the price difference, referred to as “sell first, buy later.”

Understand the basic concepts of Futures Trading.

Leverage: Using small funds to leverage large returns is one of the reasons why Futures Trading is gradually favored by crypto investors. Currently, the leverage offered by mainstream exchanges can generally reach up to 100x, but while amplifying returns, it also increases risks.

Margin: In the futures trading market, users need to pay a small amount of funds as a guarantee for fulfilling the contract based on the current opening price, which we refer to as contract margin. The margin required for opening a position is called the initial margin; to maintain the current position, it is also necessary to hold a margin that is a certain percentage of the position value, which we call maintenance margin.

Liquidation Mechanism: When the user's available margin balance is insufficient to maintain the margin, the system will forcibly close their position, also known as liquidation.

Funding Rate: In the cryptocurrency market, there are two types of futures contracts: delivery contracts and perpetual contracts. To ensure that the contract prices converge with the spot prices in the long term, delivery contracts are settled monthly or quarterly, and through regular settlements, the market prices of delivery contracts return to the spot prices. On the other hand, perpetual contracts do not have a delivery date. To maintain price stability, a funding rate mechanism is introduced to narrow the basis.

How to engage in Futures Trading in the Coin circle?

Step 1: Register a Coin cryptocurrency account and enter the Futures Trading page. For newbie users, you can first click to watch the Futures Trading tutorial video and complete the quiz before this.

Step 2: Transfer funds from other accounts to the Futures Trading account.

Step 3: Choose the cryptocurrency contract you want to open. Coin currently supports over 100 positive contract trading cryptocurrencies and 2 negative contract trading cryptocurrencies.

Step 4: Adjust the leverage multiplier for the position; Coin offers multipliers ranging from 3x to 100x for you to choose from.

Step 5: Adjust the margin ratio of your position. The Coin community suggests that you do this based on your own risk tolerance.

Step 6: Place orders based on the different order types provided by Coin crypto futures.

Finally, futures trading, as a special product with investment value, is influenced by various factors, resulting in significant price fluctuations. High leverage and high risk are its characteristics, but users find it difficult to fully grasp in actual operations. Newbie users still have a lot of knowledge to learn, and they should be cautious when entering the market rashly.

What are the differences between traditional futures contracts and perpetual contracts?

For many newbie users who have just entered the crypto industry, it is difficult to distinguish the differences between Futures Trading (also known as delivery contracts) and perpetual contracts in a short period of time. Moreover, for new investors who are playing with contracts for the first time, whether to choose traditional Futures Trading or perpetual contracts is also a question that needs to be considered. So what are the differences between these two types of contracts? This article will provide a detailed explanation today.

First of all, a futures contract is the object or underlying asset for futures trading. It is a standardized contract uniformly formulated by the futures exchange, stipulating the delivery of a certain quantity and quality of physical goods or financial products at a specific time and place in the future. For example, the Chicago Mercantile Exchange specifies that the trading unit for wheat futures contracts is 5,000 bushels. If a trader purchases one wheat futures contract, it means they need to buy 5,000 bushels of physical wheat on the expiration date specified in the contract.

Perpetual contracts are a type of cryptocurrency derivative similar to futures contracts, akin to a margin spot market, where the price is anchored to the spot market price of the underlying asset through funding rates. Compared to futures contracts, the most significant feature of perpetual contracts is that there is no delivery date or settlement date, allowing users to hold positions indefinitely. Let’s illustrate with an example: suppose a user opens a position in the BTC/USDT long contract market on a trading platform; unless there is a liquidation or the user manually closes the position, the user can hold this position indefinitely without the restrictions of a delivery date.

Overall, the differences between perpetual contracts and traditional Futures Trading mainly include the following points:

1. Different underlying assets

Traditional futures contracts are mostly based on a certain physical commodity or financial asset, such as soybeans, oil, stocks, and bonds.

The underlying assets of perpetual contracts are mainly cryptocurrencies, such as the forward contracts BTC/USDT, ETH/USDT, etc.

2. The trading times are different.

The trading hours for traditional futures contracts are uniformly set by the futures exchange, usually lasting 9 hours each day, with settlement occurring monthly, quarterly, or annually. In contrast, the trading hours for perpetual contracts are 7*24 hours, allowing users to buy and sell on the platform at any time, with no settlement date.

3. The design mechanisms are different.

Traditional Futures Trading contracts usually employ a “liquidation sharing” mechanism. If a liquidation event occurs due to severe market fluctuations that prevent certain users from closing their positions in time, resulting in a margin that cannot cover the losses, the losses of the liquidated users are shared by all the profitable users on the platform.

Perpetual contracts typically employ an automatic position reduction mechanism to mitigate market risks by reducing the positions of counterparties; it is worth mentioning that the perpetual contracts in the Coin crypto circle utilize multiple contract mechanisms such as insurance funds and automatic position reduction, with insurance funds ensuring that users experience zero loss sharing.

4. The perpetual Futures Trading price is usually closely related to the spot market.

Unlike the futures contract price, which may deviate from the underlying spot price, perpetual contracts are typically closely tied to the price of the underlying asset they track, meaning that the trading price of perpetual contracts is closely related to the spot market.

Perpetual contracts are benchmarked against spot prices, making it less prone to malicious “pinning” liquidations, while futures contracts are more susceptible to “pinning” liquidations. The prices of futures contracts are generally based on the trading platform's own order book prices, which are influenced by the “buy price” and “sell price” in the order book.

It is worth noting that Coin Circle adopts a uniquely designed reasonable mark price, which is derived from multiple mainstream exchanges to reduce market deviation; at the same time, it uses a funding rate mechanism to ensure that futures prices and spot prices are basically consistent.

So which contract trading model should newbie users choose? The author suggests that newbie users can start by trying perpetual contracts. First, perpetual contracts have no expiration date, and users can hold their positions indefinitely; secondly, perpetual contracts allow for flexible leverage adjustments. For example, Coin's perpetual contracts offer leverage of up to 100 times, and users can adjust the leverage flexibly based on their trading needs after opening a position. While the platform provides flexible risk protection, it also ensures the best trading experience for users.

What kind of opportunities does the funding rate reveal?

Perpetual contracts are a very unique type of product in the cryptocurrency trading market; they are a type of futures that do not have an expiration date. In delivery contracts, since contracts are settled periodically, even if there is a significant price gap between the contract price and the spot price, by the settlement date, it will ultimately revert to the spot price.

Perpetual contracts, due to the absence of an expiration date, allow users to hold positions indefinitely. Without the introduction of a correction mechanism, it is likely that the divergence between contract prices and spot prices will persist and even widen, leading to a situation where prices become decoupled. Therefore, perpetual contracts utilize a funding fee mechanism to align the market price of the contract with the spot price, thereby anchoring the spot price.

Funding fees are charged or received every 8 hours. When the funding rate is positive, long positions will pay the funding fees while short positions will receive them. If the rate is negative, short positions will pay the funding fees to long positions. When collecting funding fees, the system will use the funding rate calculated one minute before the last settlement moment; for example, when the system settles at 16:00, it will take the funding rate calculated at 07:59 to collect the funding fees. Funding fees are only charged between users, and the platform does not collect them.

The formula for calculating funding fees is as follows (taking Coin as an example; other exchanges may differ in their calculation methods):

Funding Fee = Position Value * Funding Rate

Funding Rate = Clamp(MA((( Depth Weighted Buy Price + Depth Weighted Sell Price) / 2 - Spot Index Price) / Spot Index Price - Interest), a, b)

*Interest is currently 0, a=-0.375%, b=0.375%

*Depth Weighted Buy Price = The weighted average price of buy orders with a cumulative transaction volume reaching a certain quantity; Depth Weighted Sell Price = The weighted average price of sell orders with a cumulative transaction volume reaching a certain quantity.

* Clamp(A, B, C): When A is within the range of B and C, take A; otherwise, the lower limit is B and the upper limit is C (B < C)

So it can actually be seen that when the funding rate is positive, it indicates that the market is generally bullish. When the funding rate is negative, it indicates that the market is generally bearish.

So what kind of opportunities does the funding rate reveal? First of all, the value of the funding rate can serve as a reference indicator for the bullish and bearish trends; however, it can only be used as a reference, as it is difficult to have a comprehensive judgment of the market relying on a single indicator.

Second, for arbitrageurs with a larger amount of capital, they can arbitrage through the funding rate of perpetual contracts. Since the funding rate for this time period is actually calculated based on the data from the previous time period, it has a certain delay. Therefore, one can roughly estimate the actual funding rate for this time period based on the predicted funding rate.

When the funding rate is very high, we can buy 1 BTC in spot while shorting 1 BTC in a perpetual Futures Trading contract. Regardless of whether the BTC price rises or falls, the spot can hedge the gains and losses of the contract, allowing us to earn the funding rate paid by the long position to the short position. For example, if the current funding rate reaches 0.1%, at the current price of BTC 41000 USDT, we can also obtain a profit of 41 U.

Of course, at this time we also need to closely monitor the funding rate situation in the next time period. If the funding rate drops significantly, we can close our positions to take profits. If the funding rate changes from positive to negative, we can decide whether to engage in reverse arbitrage operations based on the level of the funding rate.

For users engaging in Futures Trading, it is essential to learn to observe market data, and the funding rate is a very important part of it. When we have a sufficient judgment of the market and seize the opportunity to act, we can better grasp market sentiment and obtain the returns we deserve.

What are the futures trading margins?

Margin is an important term that we must encounter when understanding Futures Trading. There are many terms related to margin, and many people can easily become confused when they first come into contact with it. In this article, we will provide a detailed introduction to the different meanings of contract margin.

First, we need to understand that the margin system is a very important mechanism in Futures Trading, and margin can be seen as a type of deposit. In perpetual contracts, depending on your opening position value and leverage ratio, the market will require you to pay a small amount of funds at a certain ratio. This portion of funds is what we refer to as margin, which is actually the collateral for your contract position.

Initial Margin

The first thing to understand is the initial margin, which refers to the margin required to open a position. Initial margin = Opening value * Initial margin rate, Initial margin rate = 1 / Leverage multiplier * 100%.

Assuming the current Bitcoin price is 30000 USDT, we want to go long 1 BTC with 10x leverage, then the position size at this time is 1 BTC.

Opening Value = Position Size * Opening Transaction Price = 1 * 30000 = 30000 USDT;

Initial margin rate = 1/leverage multiple*100% = 1/10*100% = 10%;

Initial margin = opening value * initial margin rate = 30000 * 10% = 3000 USDT.

Therefore, when opening this Futures Trading order, we need to prepare at least 3000 USDT in the account as initial margin.

Frozen Margin

The frozen margin refers to the initial margin and fees that need to be frozen when the current order cannot be executed immediately. In simple terms, it is the portion of the margin that needs to be frozen before our limit order is executed. The calculation method is as follows:

Long Futures Trading:

Initial margin = Position size * Buy (or Sell) limit price * Initial margin rate

Frozen Fee = Contract Quantity * Buy (or Sell) Limit Price * Maker Rate

Inverse Contract:

Initial Margin for Freezing = Contract Quantity * Contract Value / Buying (or Selling) Limit Price * Initial Margin Rate

Frozen fee = Futures quantity * Contract value / Buy (or sell) limit price * Maker fee rate

For example, at the Coin exchange, we set a limit order to buy 1 BTC with 10x leverage when the price of Bitcoin is 30000 USDT. At this moment, the price of Bitcoin is still at 30001 USDT, so the limit order at 30000 USDT cannot be executed immediately. Assuming our VIP level is LV5, the Futures Trading Maker fee rate is 0.0200%, then:

Initial Margin = Position Size*Buy Limit Price*Initial Margin Rate = 1*30000*10%=3000 USDT

Frozen fee = Contract quantity * Buy limit price * Maker rate = 1 * 30000 * 0.0200% = 6 USDT

Therefore, before this limit order is executed, we need to freeze an initial margin of 3000 USDT and a fee of 6 USDT, totaling a frozen margin of 3006 USDT.

Maintenance Margin

The maintenance margin refers to the minimum margin level required to maintain the current position. Maintenance Margin = Total Opening Value * Maintenance Margin Rate, Total Opening Value = ∑ Historical Opening Value of Increases and Decreases.

According to the official Coin cryptocurrency website, when the position level is between 0-10 BTC, the maintenance margin rate is 0.50%. Based on the above case, the maintenance margin = opening value * maintenance margin rate = 30000 * 0.50% = 150 USDT.

Margin Requirement

Position margin refers to the margin that is used and locked by the position. In the isolated margin mode, when the position margin is less than the maintenance margin, the position will be forcibly liquidated, and users can manually add or reduce the position margin; in the cross margin mode, when the position margin is less than the maintenance margin, margin will be automatically allocated from the available balance to this position.

Margin Position = Initial Margin + Additional Margin - Reduced Margin + Unrealized Profit and Loss

For example, when the price of Bitcoin is 30,000 USDT, and we go long 1 BTC with 10x leverage, we have prepared an initial margin of 3,000 USDT, and there is also an available margin of 2,000 USDT in the account. At this point, if the price of Bitcoin drops by 5%, the mark price will be 28,500 USDT, and no manual margin addition has been made.

At this time, our unrealized P&L = position size * (mark price - opening average price) = 1 * (28500 - 30000) = -1500USDT;

Margin = Initial Margin + Additional Margin - Reduced Margin + Unrealized Profit and Loss = 3000 - 1500 = 1500USDT.

Futures Trading win rate VS profit-loss ratio, which is more important

The current cryptocurrency market spot prices continue to decline, and financial derivatives—Futures Trading—are becoming the focus of investors' attention. According to data from Coinglass, the average daily trading volume of contracts across the network is more than twice that of spot trading. With this enormous trading volume, accurately predicting market direction and utilizing its high leverage characteristics to achieve asset profitability is a challenging issue that all Futures Trading players are pondering.

In fact, clarifying the concepts and relationships between the contract win rate and the profit-loss ratio is a key step in solving the problem.

What is the contract win rate?

The so-called win rate, as the name suggests, is the probability of winning.

Calculation formula: Win rate = Number of profitable trades / Total number of trades x 100%

In Futures Trading, if a trader has made 10 trades and won 5 of them, their win rate is 50%. Some friends might notice that some traders don't have a very high win rate in their real trades, and they often have to cut losses, yet their asset profits are quite substantial.

In the book “Technical Analysis of Financial Markets,” it is stated that “the best traders can only make money on 40% of their trades.” While the win rate is indeed a very important factor, the market changes rapidly, making it difficult to maintain a consistently high trading win rate. According to a ten-year data study by a certain institution, the average win rate of top Wall Street traders is only 35%~50%. So in this situation, how can we profit in the Futures Trading market?

This requires an introduction to the concept of profit and loss ratio.

What is the profit and loss ratio?

Calculation formula: Profit and Loss Ratio = Average Profit Amount / Average Loss Amount

Taking the example of guessing a coin, if you guess correctly, you win 1U, and if you guess incorrectly, you lose 1U, then the profit-loss ratio is 1:1; if you guess correctly, you win 3U, and if you guess incorrectly, you lose 1U, then the profit-loss ratio is 3:1.

Assuming Trader A always opens a position with an amount of 10000U, the relationship between win rate and profit-loss ratio is as follows:

The table shows that it is possible to be profitable even with a low win rate. Even if your win rate is only 30%, as long as the profit-loss ratio is high, the long-term result of trading will still be profitable.

How to improve the profit and loss ratio?

In fact, to improve the profit-loss ratio, we can find the answer from the calculation formula of the profit-loss ratio. That is to increase the average amount of profit or reduce the average amount of loss.

Increasing the profit of each trade and reducing the loss of each trade may seem like a false proposition. Because for each trade, before the outcome occurs, the profit and loss ratio is uncertain, and traders find it difficult to determine future profits. However, we can control the maximum loss point for each trade, which is commonly referred to as stop-loss. By setting the maximum loss point for each trade, or establishing exit conditions, once the conditions are met, even if the direction is wrong, the position should be sold to avoid being deeply trapped due to significant losses.

From this perspective, the take-profit and stop-loss tools are indeed very useful and greatly beneficial for us. Assuming that the stop-loss point for each trade is set at 10% of the initial amount, and the take-profit point is set at 20% of the initial amount, with a fixed position trading logic for each trade and a risk-reward ratio of 2:1, as long as the win rate reaches 33%, the account can achieve a balance between profit and loss.

Finally, judgment errors are a common phenomenon during trading. Excellent traders should strive to maximize profits rather than the number of wins. In addition to the theoretical knowledge mentioned above, another key to making profits in the Futures Trading market is whether one can achieve the unity of knowledge and action, which means strictly adhering to your trading strategy. The reason why most traders lose money is not due to a lack of understanding of these theoretical concepts, but rather because they fail to achieve the unity of knowledge and action.

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