Trading cryptocurrencies has moved on from just buying digital assets at low prices and selling them at a high value. Now we have a time machine that allows us to buy digital assets in the future. Just kidding!
However, how people trade cryptocurrencies has evolved. Gone are those days when people focused on spot trading. There are various ways you can trade and still make profits. One such way is by trading futures. And no, we won’t need to borrow the time machine from the Cyborgs to trade in the future. So what are crypto futures?
An Introduction to Crypto Futures Trading
Before we talk about crypto futures, let’s have a little chat about futures contracts. A futures contract is a legal agreement between parties to purchase or sell a particular asset at a later date in the future. Why would someone prefer to participate in a futures contract? When you agree to a futures contract, you’re offered the ability to add leverage to that investment. With this in mind, what are crypto futures?
Crypto futures are the same thing as futures contracts. However, this time you’re investing in digital assets otherwise called cryptocurrencies. When you buy a cryptocurrency in the futures market, you don’t own the crypto asset. You rather own a contract with an agreement to either buy or sell that particular digital asset at a future date.
Crypto futures trading allow you to take advantage of the volatility of cryptocurrencies and make a profit from price movement. Depending on the amount of risk and your analysis, futures traders can go long or short on a digital asset and make profits.
Introduction to Binance Futures
Binance is regarded as a pioneer of the crypto industry. Changpeng Zhao founded Binance in 2017 in China. Over the last four years, Binance has grown into a powerhouse to become the world’s largest cryptocurrency in trading volume. And why is this? Because Binance offers a lot of options to traders and investors and is a host to hundreds of cryptocurrencies and trading pairs.
Amongst the vast options, Binance gives to traders is futures trading. Binance launched Futures trading in September 2019. The purpose was to change how crypto margin trading was done. Over the years, the number of futures traders keeps increasing.
Hi, my name is Adremy and I’m your tour guide for today. In this article, I will give you a tour of Binance Futures, how to get started and the terms you need to understand to become a successful futures trader. Let’s get started.
How to Get Started on Binance Futures
The first step to trade futures on Binance is to open an account with the exchange. If you’re yet to have an account with Binance, you don’t need to worry. Binance has provided a detailed guide on how you can create an account on the platform. In that guide, you will also learn how to fund your account. You need to have funds in your exchange wallet.
After creating an account and funding it, click on the derivatives tab and choose the Binance Futures option. On the new tab, Binance will give you a little quiz you need to pass before trading futures. Watch out, some questions are simple but tricky.
Most questions are trading-related. Binance wants to make sure you know the basics of trading and risk management. You don’t want to wake up to liquidation “love letters” from Binance, do you? So carefully read through them. After passing your quiz, you are ready to trade futures.
The next step is to fund your futures account. You can move your funds from your Exchange wallet to your Futures wallet. If you are yet to deposit funds in Binance, there is a guide for you.
After funding your Futures wallet, the next step is to choose your preferred future contracts. There are two future contracts Binance offers to crypto traders. Do you want what they are? Don’t worry. I’ve got you covered.
You can access the USD-Margined Futures Contracts or the Coin-Margined Futures Contracts. Both names indicate what they represent. The USD-Margined Futures Contracts support perpetual and delivery contracts in USDT and BUSD. The Coin-Margined Futures Contracts on the other hand support perpetual and delivery contracts in cryptocurrencies.
Once you’ve chosen your missing rib, you’re set to place a trade and make profits trading futures.
Wait! That’s not all though. There are still some spaces we have not touched on our tour. How about I introduce you to our neighbors.
Meet Our Neighbors
To trade successfully in Binance Futures, there are a few terms (I prefer to call them neighbors) you must know and become friends with. You must know your neighbors very well as you will need them every time you place a trade. Let me introduce you to your next-door neighbor.
Your neighbors to the right are the order types. Binance supports a lot of order types for futures traders. I will highlight all of them and tell you what they mean.
A limit order is a buy order you place on the order book with a specific limit price. What does this mean? If you place a limit order, that trade will only happen if the market price reaches your limit price. If you want to set a limit price, you will have to specify the price at which you want to buy or sell. When the price of the coin you’re trying to buy hits that mark, Binance will have an order to buy or sell at that specified price. Limit order gives you control over how and when you want to buy or sell.
A market order is an order you place to buy or sell at the best available current price. When you place a market order, you want your trade to happen at the best available price. This is a better option for traders who prefer making a trade at any price rather than wait for a particular price or timeframe. Always remember that using market orders will attract fees.
Stop Limit Order
The stop-limit order is a combination of the stop order and the limit order. The stop order triggers the limit order and the limit price is the price of the limit order that is triggered. This means that once your stop price has been reached, your limit order will be placed on the order book.
Let’s say you believe that $32,000 is a good support level for BTC and you bought some BTC at that level. But no one can completely predict the market. So you will want to take some measures to avoid losing money if the market goes sideways. How can stop-limit order help you do this?
You can set your stop-limit order with the stop price at $31,800 and the limit price at $31,400. The stop-limit order will work if the stop price of $31,800 is reached and the limit order will be filler if the market price hits $31,400. If your limit order is triggered but the market price doesn’t hit $31,400, your limit order will remain open.
In general, stop-limit orders serve as a great risk management tool to avoid significant losses when the market goes in the opposite direction.
Mark Price and Last Price
Binance Futures traders use the last price and mark price to avoid liquidation. The last trade in the trading history determines your last price. You use your last price to calculate your realized profit and loss.
However, you use the Mark Price to prevent price manipulation. The Mark price is calculated by using a combination of funding data and price data from other major exchanges.
Leverage is the ability to control a large contract value with a fairly small amount of capital. Leverage in futures trading makes it capital efficient. With leverage, you can open a position at a fraction of the actual cost. The more leverage, the less money needed to open a position. Also, the larger the size of the potion, the smaller the amount of leverage you have.
Binance allows you to manually adjust the leverage for each contract. You can adjust as you want. However, note that using high leverage carries a high risk of liquidation and losing your funds.
Now, this is a neighbor you should avoid at all costs. You meet liquidation when your margin balance is below the required margin needed to keep your positions open. Your margin balance is your futures balance including your unrealized profit and loss. Your balance grows when you’re in profit and it reduces when you’re at loss. What happens when you’re liquidated? All your open orders are canceled. You also get a love letter from Binance that lets you know you have been liquidated.
The End of Our Tour
That’s it, guys. This is where we end our tour. I hope you enjoyed the tour. It was amazing taking you around Binance Futures and introducing you to our lovely and not so lovely neighbors.
Trading futures can be lucrative and challenging too. However, just like other trading strategies, you need to acquire proper knowledge and apply the right risk management techniques to avoid getting a call from liquidation.
If you’re interested in trading on Binance Futures, click on this link to get started.