What is Crypto Futures Trading?
Crypto futures is a type of financial derivative that allows traders to speculate on the price movement of cryptocurrencies. Like Forex Futures trading, crypto futures utilizes pairs of currencies to create a trading environment. Traders can enter long or short positions and leverage to amplify their profit potential.
Leverage is like a multiplier for your position, allowing you to purchase more crypto coins than your capital’s original amount without adding more money or taking out a personal loan. These values are usually expressed as x(number), like x5. For example, a trader may purchase the Bitcoin-Tether pair for $100 and set the leverage for x10. This will essentially allow the trader to enter a $1,000 position, and any profit earned from this borrowed amount will get paid out in full once they exit the position (less fees and taxes, of course.)
So let’s say your $100 capital was leveraged up to $1,000, and you made 50% profit from that borrowed position. As a result, you will get a 500% profit on your original investment. Now swap out the original $100 capital to $1,000 or $10,000, and you’ll get an idea of the kind of allure Futures trading holds for traders. Win big enough, and you’ll be set for life driving Ferraris in Italy and living the high life.
Of course, like with any investment (or anything in life), anything that sounds too good to be true probably has a catch. In this case, it comes in the form of the liquidation price.
The Dreaded Liquidation Price
In exchange for borrowing money from the broker, your capital and any other amount you place in your wallet will be up for forfeit should the coin pair reach a specific price opposite your prediction. Once the coin pair reaches its liquidation price, the broker or platform immediately takes all capital and any amount in your wallet that is put up as leverage, and you lose your position. The liquidation price is automatically computed based on your capital, the amount in your crypto wallet, and any other futures positions you might hold at the time if you choose to “cross” your positions. The more money you have in your wallet and/or other positions, the further your liquidation price is from your entry price. Inversely, the higher your leverage, the closer your liquidation price is to your entry price, making it exponentially riskier in exchange for the potential for tremendous profits. Leverage can vary depending on coin pair and prices; Bitcoin allows traders to go as high as x125, while most coin pairs go up to only x20 or x50.
The Big Five Coins
The top five crypto coins as of 2023 are Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Binance Coin (BNB), and USD Coin (USDC). Bitcoin, of course, is the very first cryptocurrency in existence. It was launched in 2009 by an individual or group known as “Satoshi Nakamoto.” Ethereum is a well-regarded crypto coin that was launched in 2013. Binance Coin is the primary cryptocurrency of the trading platform Binance, the world’s largest cryptocurrency exchange.
Tether and USD Coin are different from the rest — they’re called “stablecoins.” These crypto coins serve as asset references, “pegged to” or reflecting a currency or commodity in traditional markets. These coins are strictly regulated by algorithms that maintain their supply and prices to closely resemble their regular-market counterparts.
Common Trading Strategies
Trading crypto is no different than trading other currencies — other than the extreme volatility. It’s been said that crypto trading is akin to regular trading on steroids, and I tend to agree. And with Crypto Future’s leveraging arrangement, this volatility is magnified to a ridiculous degree.
Therefore, any trading strategy must adapt to the environment. Since you are trading at elevated values, monitoring price movement in shorter intervals is your best bet. Most futures traders use 3- or 5-minute chart intervals for a closer, more sensitive overview of price movement.
Some of the most common and reliable trading indicators used by crypto futures traders are Moving Averages (MA), Relative Strength Index (RSI), Moving Average Convergence-Divergence (MACD), and Bollinger Bands. Here’s a quick overview of each of them:
Simple Moving Averages (SMAs) and Exponential Moving Averages (EMAs)
SMAs and EMAs have a lot of fans, and for a good reason. The trading strategy generates a moving line based on average trading prices for a specific period, and signals flash when these lines cross each other. Users have a lot of flexibility in setting up these lines, with the most commonly used for trading and investing being the 30, 50, 100, and 200 moving averages.
Crypto Futures trading has different requirements, and most traders agree that setting up a shorter timeline for the line averages helps create a more sensitive indicator. In this example, I’m using the 5, 8, and 13 moving averages within a 3-minute interval (each bar representing one value in the moving average computation). The arrows show crossovers that could have been entry or exit points for traders.
Bollinger Bands ®
Another popular indicator for crypto futures trading is the Bollinger Bands®. This indicator creates a channel indicating moving security’s upper, lower, and average price levels. It’s primarily used to identify overbought (the price touching the upper band) or oversold (the price touching the bottom band) levels, possibly indicating a movement reversal.
I say “possibly” because no indicator is perfect on its own. I’ve tracked the few times Ethereum touched the upper and lower bands on the chart below:
As you can see in the middle of the chart, the price touched the upper band twice before surging upwards for another touch. Only then did the price rebound to the lower band, which is now significantly higher than the previous lower channels’ prices.
Another notable aspect of the Bollinger Band® is the Squeze, wherein price volatility becomes so low that the channels narrow. This may indicate significant movement in the short term, depending on which band the price crosses into and how long it stays there.
The Relative Strength Index is a momentum oscillator that provides overbought or oversold signals over a 100-point chart. Traditionally, 70 on the RSI chart indicates overbought coins, while 30 displays oversold conditions. The general understanding is that overbought coins are due for a kick downward, while oversold ones will jump in price. However, one limitation of this indicator is that oversold and overbought conditions can last more than a few trading sessions, depending on how prices move. This limitation can be addressed by pairing it with another indicator, like simple or exponential moving averages. For reference, view the chart below.
Which one should you use for Crypto Futures trading?
Like any trading practice, your strategy largely depends on your requirement, risk profile, trading style, and personality. However, one recommended practice is using two indicators for signal confirmation and pairing the signals with volume. Volume is one of the simplest indicators any trader can use to gauge other traders’ interest in the coin pair.
The Importance of Cutting Losses
Cutting losses is an art, especially with Crypto Futures trading. Extreme price swings mean your position can reach its liquidation price in three seconds. A solid trading strategy can mitigate that risk. Higher leverage means higher price sensitivity, so adjust your cut loss percentage accordingly. I’ve seen traders set their cut-loss prices at 20% for each trade.
The Importance of Emotional Management in Crypto Futures Trading
Futures trading is a high-risk, high-reward derivative where fortunes are won and lost in as fast as a few seconds. With crypto’s extreme volatility (where price movements can move as high as 100% in a few minutes), futures traders will be subjected to wide price swings and close calls.
Without a solid strategy, a non-negotiable cut-loss level, and a firm grasp on your emotions, you might be tempted to sell at the first sign of reversal or when your position goes red (or negative). To avoid this, a trader must be disciplined to develop and uphold their trading strategy despite extreme price movements.
All these can be honed by gaining trading experience, doing extensive backtesting, and learning enough about the practice to write a book about it.