Futures trading, as the name suggests, deals with the future. These types of contracts are concluded between two people in the present or the past, but their due date is in the future. In these transactions, a certain asset, which can be a variety of commodities, precious metals, digital currencies, etc., is traded at a certain time and at a certain price agreed upon by the parties to the contract.
What is futures trading?
Consider that you have a construction company and you are going to deliver a finished tower in 6 months. According to your experience and calculations, you have realized that you will need 15,000 rebars during the construction of this project, so that you can manage the costs, you have set aside part of your budget for rebars, but no one has guaranteed that when the building The target reaches a stage that requires rebar, prices have not changed.
So to avoid these market fluctuations, futures trading is the best choice. You can set up a future contract with the rebar factory to buy rebar at a specific price and include the delivery date of the rebar in that contract.
Also, you, as a buyer, have injected cash into the factory by paying the fee at the time of signing the contract, and you have turned the production wheel or increased the production rate.
This type of contract is very effective, especially for factories that are out of business due to the lack of required assets; Because in future contracts, generally, the amount specified in the contract is paid by the buyer at the very beginning.
Types of futures transactions
Financial market traders can use the facilities and features of one of the types of trading methods based on their investment strategy and trading plans. Futures transactions are also offered in different types and users can choose the most suitable option among them.
Since not all digital exchanges support different types of futures transactions, it is necessary to pay attention to this point after choosing the desired trading method. In the rest of this section, we will introduce the types of futures transactions and their features.
Standard Futures Contracts
Futures trading is one of the most popular types of trading in the crypto derivatives market. In this type of transaction, the two parties agree on the future price of a digital currency on a predetermined date. Standard futures trades also have an expiration and settlement date.
In this way, this contract will finally end on a specific date based on a predetermined price. Most digital exchanges such as Binance, BuyBit, Coinx, Kocoin, BingX, etc. support this type of futures transaction.
Futures with physical delivery
Futures transactions with physical delivery are another type of futures transaction. As the name of this type of transaction suggests, based on futures transactions with physical delivery, digital currency or other types of valuable assets in this type of contract are physically delivered to the buyer on the settlement date. As a result, it can be said that in futures transactions with physical delivery, all the features of the futures contract, including the due date of delivery of the goods, have been determined in advance.
Perpetual contracts
In permanent trading as well as standard futures trading, traders speculate on the future price of a specific asset. However, unlike standard futures transactions, permanent transactions do not have a maturity or expiration date. In this way, traders can maintain the desired position before the liquidation of the asset or generally settle at the desired time. Like standard futures transactions, permanent transactions are also available to users in many digital exchanges.
What are the characteristics of futures transactions?
- Future price speculation
In futures trading, speculation is made on the future price of a specific asset. As a result, this type of transaction is a type of bet on the direction of the price of the asset in question. - Profit from the market trend
In a futures transaction, the buyer side benefits from the price increase, and the seller side benefits from the price decrease. - Creating long and short positions
In futures trading, it is possible for traders to use the up and down trends of the market by creating short (sell) and long (buy) positions and earning profit. - Having high trading experience
Since entering into futures trading requires high trading knowledge and the use of analytical tools, this trading method is suitable for professionals and is not recommended for beginner traders. - Relatively high risk compared to spot transactions
Futures transactions are risky transactions; Therefore, while they can be very profitable, they may cause a lot of losses to a person. - Having high trading knowledge
Analytical and technical information is very important in futures trading. Because the trader must be able to perform a correct analysis based on the available information and statistics and predict the future state of the cryptocurrency in question. As a result, if a person is not well trained and is not familiar with the characteristics of the market, by entering his capital in this type of transaction, he will take a high risk and suffer many losses.
Application of futures trading
One of the most famous features of the digital currency market is the high volatility in the prices of digital assets. However, every day many traders succeed in making high profits by using the right trading tools and investment strategies. For example, traders can take advantage of market fluctuations and earn profits through futures transactions, regardless of the increase or decrease in market prices.
It is enough to use analytical tools and predict its future price based on the market situation and the inherent value of the cryptocurrency in question. In this way, if you think that the price of the desired coin will increase on a certain date, create a buy position. Also, if you come to the conclusion that the price of the desired coin will fall, you will create a sell position. As a result, as you have seen, the main use of futures trading is to use the fluctuating state of the market and gain profit in two market states.
Why trade in futures?
As mentioned, traders enter into futures trading with the aim of taking advantage of market fluctuations and predicting the future state of a digital asset. In this way, the trader earns profit by predicting the future of cryptocurrency and creating a buy or sell position.
The main reason for trading in futures is risk management in the investment portfolio. Because in this type of transaction, unlike spot transactions, is not only in the upward trend; But you can also make a profit when the market falls. Another reason that usually makes traders want to trade futures is that they offer a leverage option. Despite this option, the trader can borrow a certain part of the capital from the exchange and increase his profit by the same amount.
As a result, if you have enough knowledge about the trading and analytical tools and factors affecting the crypto market, and you can also follow and analyze the economic and political news related to the financial markets well, entering into futures trading can be a good profit for you.
What is the leverage of futures trading?
Leverage is considered to be a main tool of digital currency futures trading and the forex market. Leverage may seem risky and dangerous at first glance, but if used correctly, it can change the game in your favor and dramatically increase your trading profits. However, leverage acts like a double-edged sword and can increase capital risk and losses by the same amount if used incorrectly. What exactly is the use of leverage in futures trading?
When the trader intends to enter the futures transaction, it is necessary to transfer an amount from the main account of the exchange to the futures account of the exchange. In the next step, the user can use leverage to increase his trading capital and borrow an amount from the exchange. In this way, by using leverage, a person can significantly increase his small capital and change the profit and loss of the transaction in the same proportion. Before using leverage for futures trading, pay attention to the following points:
- Using a proper trading strategy
- Control emotions and make logical and scientific decisions
- Trading risk management using analytical tools
What are the advantages and disadvantages of futures contracts?
Like other trading methods, futures have advantages and disadvantages. In this way, before using this method, it is necessary to familiarize yourself with all its features, advantages, and disadvantages and enter into the transaction by considering all these things. In the following, we introduce the most important advantages and disadvantages of futures contracts.
Introducing the benefits of futures trading
- High liquidity
Due to the high popularity of this trading method, many traders enter into futures trading. As a result, this market always has high liquidity and traders can enter or exit the transaction at any time. - High variety of currency pairs
Various currency pairs are supported in the futures trading panel of many cryptocurrency exchanges. As a result, users can easily find the desired currency pair and create a new position. - Earning profit from the downward trend of the market
In the spot trading panel, the user earns profit only if the prices grow. But in futures transactions, the user can profit by creating short positions in the downward market conditions.
• risk management
By entering into futures transactions, you can reduce the risk of the value of your asset going down. For example, imagine that you have some Bitcoin, due to the market conditions, it is believed that the Bitcoin currency will decrease in the future, you can reduce the risk of diminishing the value of your asset by entering into a futures transaction and creating a short position. - Use of leverage
Leverage in futures trading is another advantage of this trading method. You can use it to increase your trading capital and earn more profit.
• Fundraising
In addition to the digital currency market, futures transactions are also available in the stock and forex markets. Companies and factories can attract good capital through futures transactions. In this situation, futures transactions act like the pre-sale of factory products. In this way, these companies sell their products through futures transactions and attract the capital they need.
Introducing the disadvantages of futures trading
- Improper use of Lorridge
As mentioned, the presence of Lorridge is like a double-edged sword. By using this trading tool, you can not only increase the amount of capital and profit, but its incorrect and emotional use can increase the risk of the transaction and make a person face multiple losses. - The high sensitivity of the digital currency market
In addition to fluctuating like any other financial market based on market conditions, the cryptocurrency market is simultaneously affected by political, economic issues and even the opinions of influential people. This issue has made it difficult to predict this market and it changes contrary to expectations. Finally, since crypto trading is done based on market predictions, such sudden changes can be detrimental to the trader.
Who is digital currency futures trading suitable for?
Futures trading is one of the advanced and complex trading methods. This trading method is suitable for people who have sufficient knowledge and experience in the field of financial transactions. In addition to updated information and continuous training, these people must spend a good amount of time daily analyzing the market and checking the news of the world.
In addition to all the above, these people must enter double capital in the market and bear the risk of losing their property. Successful and professional traders always make decisions based on technical analysis and available statistics and avoid involving emotions. If you have these conditions, you can be a good candidate for futures trading.
Basic Concepts of Crypto Futures Trading
Before entering crypto futures trading, you need to familiarize yourself with the concepts and terms used in this trading panel. Below is a list of the most important futures trading terms. - Leverage
Leverage is one of the most widely used and important concepts in futures trading. Different exchanges offer different leverage percentages. By using it, the user can multiply his initial capital and enter into the transaction with more capital. - Liquidation
Asset liquidation in futures trading means the loss of part or all of the assets entered in the position. When the capital is subject to liquefaction, in order to prevent it from falling to a negative gross value, the user is forced to sell the asset. - Initial Margin
The initial margin, or the initial guarantee, is the amount that both parties to the futures contract pay before signing the contract. This amount is received as a deposit in order to prevent the parties from regretting continuing the transaction. The amount of initial margin can vary based on the specifications of each future contract. - Open Interest
The amount of capital that enters or exits the market is known as open interest. In this way, when a lot of capital enters the futures market of digital exchange, the open profit increases, and vice versa. In order to calculate the open profit, it is necessary to add all the open positions and subtract the result from the closed positions. - Funding Rates
Periodic payments made between traders are called Funding Rates. Based on the funding rate, the price of permanent future contracts approaches the price of the index. - INSURANCE FUNDS
Safety nets that protect traders against possible losses are known as insurance funds. In these funds, the profits of profitable traders are used to cover the losses of losing traders.
Futures trading fees
In general, transaction fees are different depending on the financial policies of exchanges. Each exchange determines and calculates transaction fees based on a predetermined algorithm. Futures transactions are no exception to this rule and, like the spot sector, receive a percentage of the transaction as a fee. According to the reviews among the exchanges that support futures trading, two exchanges, Coinx and Kocoin, charge more reasonable fees. Usually, the fee for this section is higher than other transactions. Also, in this type of transaction, until the position is open, the amount of the transaction fee increases continuously.
What is authentication for futures trading?
All cryptocurrency exchanges require users to perform authentication procedures in order to prevent money laundering and financial fraud. In most exchanges, authentication is done in more than two steps. In each of these stages, different information is received and various services are provided.
The first step of authentication: receiving identity information such as full name, user identification number, etc., and providing services such as conducting small transactions and limited withdrawals from the user account of the exchange.
The second stage of authentication: receiving more complete information such as the address of the place of residence and… providing more diverse services such as futures and leveraged transactions, unlimited withdrawals from the user account, and…
Finally, since in futures transactions, part of the trading capital is received as a loan from the exchange, it is necessary to complete the authentication process before starting.
What is the purpose of futures trading?
In general, futures transactions are concluded between the parties for two purposes:
• Risk coverage
- Speculation
By using futures transactions, you can avoid market fluctuations. If a person or a company needs a specific product in the future to do something, they can buy the product they need and receive it at a specified time using futures transactions or futures contracts.
In this case, instead of worrying about the events that may affect the price of the product, the person or company focuses on other aspects of the project and delivers the product on time. This is also true for selling goods. For example, if a factory knows that it must deliver a certain amount of the product it produces to the customer by a certain time, it protects itself from price fluctuations that cannot be predicted by using a futures contract. But in speculation, a person or a company does not need goods, and his profit is obtained from the rise or fall of the price. Suppose a person has 2000 kg of copper, with the information he has found and with the analysis he has done, he concludes that the price of copper will take a downward trend in the next 3 months. This person will make a profit by selling 2000 kg of copper that he has and then buying again after the price drops, in this case, this person may be able to buy 2500 kg of copper after the price drops. And if a person predicts that the price of copper will go up, he can profit by buying copper and selling it at higher prices. In futures transactions, two terms Long position for buying position and a Short position for the selling position are used for buying and selling. In general, transactions in financial markets are done in two ways:
- Spot
- Futures
What is the difference between spot and futures transactions?
In spot transactions or spot trading, you receive the desired product at the same time as paying the fee, and if you have a sale transaction, you must deliver the product the moment you receive the money. In such transactions in the financial markets, traders only benefit from rising prices. This type of market or transaction is also referred to as one-way because it is profitable only if the price grows.
Traders only profit from rising prices. This type of market or transaction is also referred to as one-way because it is profitable only if the price grows.
In the field of digital currencies, domestic exchanges only operate as a spot market, which means you can only buy or sell at the same moment, and naturally, you can only profit from price increases.
In futures transactions, unlike spot transactions, you can profit both from price increases and from price decreases, in other words, you are able to make bilateral transactions. It all depends on your economic knowledge and analytical power.
Suppose, based on the information you have obtained from various news, you have come to the conclusion that Bitcoin is not traded at its real price and has a so-called bubble, so it will probably fall or start growing in the next 2 months.
On the other hand, someone has a completely opposite opinion to your opinion, in this case, if you predict that the price of Bitcoin will rise in the next 2 months, you can open a buy or long position, and if the market moves according to your prediction, you You will make a profit, and of course, the same procedure applies to the price going down, that is, if the market takes a downward trend contrary to what you imagined, you will suffer a loss.
In spot trading, you never lose your capital, unless the price reaches zero, which is not very logical. If you buy 100 units of Ethereum, whether the price goes up or down, you will have 100 Ethereum.
Only the amount of your capital will change, if the price of Ethereum goes up, your capital will be more, and if the price falls, your capital will be less.
What is the margin in futures trading?
You can consider the leverage ratio as a loan provided by the exchange. In futures trading, if you use the leverage feature, your capital, profit, and loss will increase as much.
For example, if you have $10,000 in capital and use leverage 5, the exchange will give you $50,000 worth of credit to trade, and obviously, your profit and loss will increase by the same amount.
If your loss becomes so much that the initial capital you had is lost (including the fee), the exchange will close your transaction, and in other words, your account will be liquidated.
So, using leverage in futures trading requires your own knowledge and it is recommended that you never think about using leverage if you do not have enough familiarity and experience with financial markets.
We will clarify the concept of leverage with an example first for trading without leverage and then for trading with leverage.
Suppose you bought a unit of Bitcoin for $50,000 and analyzed that the price will reach $60,000, and you intend to sell your Bitcoin at that point.
If the market moves according to your analysis and reaches $60,000, you can exit the market with 20% of your profit. But if the market moves against your analysis and you sell your Bitcoin at $40,000, you will lose 20%.
But if you want to use leverage in futures trading, the situation is different.
Suppose that with 10,000 dollars of initial capital, and using Leverage 5, you intend to buy one unit of Bitcoin in the Bitcoin transaction that we gave as an example. In this case, you can have $50,000 worth of trading capital with $10,000, and you’ll probably make 100% profit instead of 20% profit, but remember, you’re not going to be lucky all the time.
So you may suffer a 100% loss instead of a 20% loss due to using leverage, before which the exchange will block your trade.
What commodities can futures be used for?
Futures contracts can be used for almost any type of commodity. Commodities, some types of food and…
But in general, futures contracts can be used for agricultural, metal and oil products or in the stock, currency and bond markets.
Which platforms support futures trading?
Domestic exchanges do not support futures trading. But various stock markets and international exchanges support this type of exchange, among which we can mention Binance, Bitmax, Beckett, Chicago Options Exchange and Chicago Mercantile Exchange Group.
last word
Note that in futures transactions, you pay the money at the time of signing the contract, but you receive the goods at the time of maturity of the contract. Of course, sometimes it happens that some of the amount is paid at the time of signing the contract, and some at the time of delivery of the goods. There may be other situations, but generally, in future contracts, the amount is paid at the beginning and when the contract is signed. Be careful when using leverage in futures trading, don’t forget that leverage can destroy your entire capital as much as it can benefit you.