What is Futures Trading?

Futures trading is a form of derivative trading where users do not need to directly hold the underlying assets. Instead, they buy or sell contracts to bet on the price going up or down, thereby making a profit. Contracts are financial derivatives that allow users to trade underlying assets at predetermined conditions and prices without directly holding the underlying assets themselves. This trading method is widely used in the cryptocurrency market as it enables users to flexibly operate in price fluctuations.

Basic Concepts of Futures Trading

Long and Short

• Long: When you predict that the asset price will rise, you can open a long futures contract to profit from the price increase.
• Short: When you predict that the asset price will fall, you can open a short contract to profit when the price falls.

Margin Trading
Leverage is a tool for amplifying capital. For example, with 10x leverage, your funds can be amplified 10 times for trading, but the risk is also amplified.

Liquidation and Forced Liquidation
When the market trend is opposite to your prediction, and the account margin is insufficient to maintain the position, the system will automatically close the position, known as forced liquidation or liquidation.

Margin
It refers to the margin required by users to open and maintain positions in futures trading. It is a guarantee mechanism in trading to ensure that users have enough funds to bear potential losses.

Funding Rate
It is a mechanism used to anchor the spot price, which is applied every 8 hours. The funding fee is calculated based on the user’s position size at the time of application. If the funding rate is positive, the long party pays the short party fee; if negative, the opposite occurs.

Perpetual Contract and Delivery Contract

• Perpetual Contract:

Perpetual contracts do not have a fixed expiration date, and users can hold them indefinitely until they actively close their positions. In order to maintain a balance between long and short positions, perpetual contracts introduce a funding rate mechanism, which is settled regularly between long and short positions (usually every 8 hours).

Features:

• No delivery date, higher flexibility.
• Funding rate will affect the cost of holding a position.

• More suitable for short-term traders and high-frequency traders.

• Futures Trading:

Futures contracts have fixed delivery dates (such as weekly, monthly, or quarterly). At expiration, the system will settle automatically, and open contracts will be delivered according to market prices.

Features:

• It has an expiration date, which is more suitable for trend traders.
• There is no funding rate involved, but the risk of price volatility at the time of delivery needs to be taken into account.

Summary of differences:

• Expiration time: Perpetual contracts have no expiration time, while delivery contracts have fixed expiration time.
• Funding Rate: Perpetual contracts have funding rates, while delivery contracts do not.
• Applicable scenarios: perpetual contracts are suitable for short-term trading, while delivery contracts are suitable for medium and long-term trend trading.

Advantages and Risks of Futures Trading

Advantage
High Yield: Leveraging funds can amplify potential returns.
Bidirectional trading: There is an opportunity to profit regardless of whether the price rises or falls.

Risk
High risk: leveraged amplification affects not only profits, but also potential losses.
Market Volatility: Price volatility can lead to liquidation.

How to start Futures Trading?

Open Gate.io and drag the mouse to the futures trading section (on mobile, just click on the futures trading page), and select USDT perpetual or BTC perpetual mode. (If you are a newbie and want to learn how to operate, you can enter the simulated trading page for practical exercises) This article will demonstrate the basic operations of futures trading using USDT perpetual contracts.

First of all, before we trade futures contracts, we need to understand the meaning of each option in the red box on the right side of the diagram.

1. Select manual trading, there are options for cross and isolated margin below, which is the option for margin (also known as USDT in the contract account)

In simple terms, cross-margin means that regardless of how many futures trading orders you have opened, they all share the same margin. If one position incurs losses, the system will use margin from other available funds in your account to avoid liquidation, which may affect other positions and lead to a chain of liquidations.

Cross-Margin: After opening multiple futures trading orders, the margin for each order is independent and does not affect each other. If a position is liquidated, it will not affect other positions.

2. Choose the leverage ratio: Choose a suitable leverage ratio

Leverage: Leverage refers to leveraged trading, which has the characteristic of magnifying profits and losses. Different tokens have different maximum leverage ratios. Taking BTC USDT perpetual contract as an example, the maximum leverage is 125X, which means that the maximum contract value that can be opened with a margin is 125 times. The higher the leverage, the greater the risk.

3. Set the order price: you can choose market price or limit price
4. Set the position value: that is, set the amount you want to open a position
5. Choose the direction of the order: buy long or sell short, which corresponds to the previous discussion of long&short positions.
6. Before placing an order, there are three descriptions under the long and short buttons.

Long/Short: The maximum position that can be opened with all assets in the futures account under the current leverage

Margin: How much margin is required for this order

Estimated liquidation price: When BTC falls to $79,511.6, this long contract will trigger liquidation and lose margin.

When BTC rises to $113856.8, this short contract will be liquidated.

7. After the order is completed, we can see our position. In the red box in the figure below, we opened a position worth $493.2, with a long position (newbies should try with small amounts or choose simulated contract trading to avoid financial losses). The opening price is $96,727.8, and the estimated liquidation price is $79,536.9. This means that when BTC falls to this price, we will be liquidated and our margin will be cleared. Here is a brief introduction to the various indicators:

Margin Ratio: The margin ratio is used to measure the risk status of the futures position. The lower the margin ratio, the higher the risk of the position. When the margin ratio ≤ 100%, a forced liquidation will be triggered. The closer the current price of BTC is to the estimated liquidation price, the lower the margin ratio.

Unrealized P&L: Assuming that the profit and loss calculated for closing at the mark price in this contract does not affect the actual settlement income. It refers to the floating profit and loss.

Realized PNL: Realized PNL includes transaction fees, funding costs (funding rate * position value = funding cost), and liquidation PNL (PNL of settled positions).

Position Take-Profit and Stop-Loss: Equivalent to placing a limit order, setting a price at which the position will be settled when reached.

Partial position take profit/stop loss: set a certain position for take profit/stop loss.

Trailing Take Profit: Set a price at which BTC reaches the price, according to the user’s set callback ratio for market price profit taking, such as setting a price of $100,000, with a 10% callback ratio for profit taking. When BTC reaches $100,000, the trailing profit taking will be triggered, and when the price falls back to $99,000, it will be settled for profit at market price.

MMR Stop Loss: Set MMR to a certain level and stop loss operation will be conducted.

Auto Deleveraging (ADL for short, not necessary for newbies to understand): It refers to a forced liquidation mechanism implemented to control the overall risk of the platform when extreme market conditions or uncontrollable factors lead to insufficient insurance funds. Click to learn more.Details.

Market & Limit Order: Settling futures contracts at market price or a specified price.

Reverse & Reverse Plan: Reverse means to settle immediately at the current market price and maintain the original position size at the current market price, and place a contract order in the opposite direction (reverse settlement opening long = settlement opening long and opening short); reverse plan means to reverse the operation after reaching the set price.

8. Choose one of the above methods to complete the settlement of the futures contract.

The above is the basic operation of Futures Trading that needs to be understood. Newbie players should pay attention to the size of their positions when learning and practicing. It is best to practice in the simulated futures trading interface.

Futures Trading Newbie Common Questions Q&A

Q: Which is better for newbies, perpetual contracts or delivery contracts?
A: It is recommended for newbies to start with perpetual futures trading, as it is more flexible and there is no need to pay attention to the expiration date.

Question: What is funding rate? How is it calculated?
A funding rate is a fee set in perpetual contracts to balance long and short positions, settled every 8 hours. The rate can be viewed on the trading platform.

Q: How to reduce the risk of liquidation?
A: Choose low leverage (2-5 times (for reference only)), control your position reasonably, and set a stop-loss price.

Notes on Futures Trading

Leverage Control: Newbies are advised to start with low leverage to avoid significant losses caused by high leverage.

Rational Investment: Do not use essential funds for trading.

Pay attention to funding rate: If you choose perpetual contracts, the longer the position is held, the greater the impact of the funding rate on the cost.

Avoid heavy positions: diversify investments to avoid large losses in a single trade.

Learn market dynamics: Stay sensitive to market trends and adjust trading strategies in a timely manner.

Summary

Through this tutorial, you have learned the basic concepts of futures trading and how to operate it. As a newbie, always prioritize risk control and gradually accumulate experience. Maintain rationality and emotional control in trading to achieve long-term stable returns. Wishing you smooth trading and enjoyable investment!

Disclaimer
This content is for reference only and does not constitute investment advice. Futures trading carries a high risk and may lead to loss of principal. Please participate cautiously based on your own risk tolerance. Trading is risky, investment needs to be cautious.