Contract and derivatives trading is the way that investors trade the future price of assets through contract form. Unlike traditional spot trading, contract trading enables investors to participate in the price fluctuations in the market without actually holding the underlying assets. Derivatives (Derivatives) refer to financial products whose value is derived from other underlying assets. Common derivatives include futures, options and contracts for price difference (CFD). In the cryptocurrency market, contract trading is also known as "derivatives trading", which includes basic trading functions such as opening positions, liquidation and leverage.
Opening warehouse (Opening a Position)
Opening a position means establishing a new trading position in the market. Investors participate in the price changes in the market by opening positions. Depending on the market moves, investors can choose to go long or short.
- Long (Long Position): long is to buy a contract, expect the market price to rise. The long goal is to make profits from rising asset prices.
- Short (Short Position): Short sells the contract, expecting the market price to fall. Short selling is designed to make a profit through falling asset prices.
Example:
Assuming the current price of bitcoin is $20,000, investors expect the price to rise. Investors decide to open multiple positions, or to buy a bitcoin contract. If the price of bitcoin rises to $22,000, investors will make a profit of $2,000 when they close their positions (selling contracts).
Conversely, if investors expect the price of bitcoin to fall, they can open short positions, borrow bitcoin contracts and sell them. If the price of bitcoin falls to $18,000, investors will make a profit of $2,000 by closing their positions (buy round about).
Closing (Closing a Position)
Unwinding is the end of an opened position, usually through the opposite operation. For long positions, liquidation is sell contract; for short positions, liquidation is buy round about.
- Long liquidation: If you open a long position, you can sell the contract to close your position when the market price goes up.
- Short position: If you open a short position, you can open a buy round when the market price falls.
give an example:
- Example: You open an extra bitcoin contract at $20,000, and when the bitcoin price rises to $22,000, you choose to sell out for a profit of $2,000.
- Short liquidation example: You open a bitcoin contract at $20,000. When the price of bitcoin drops to $18,000, you choose to unwind and buy back, earning a profit of $2,000.
Lever (Leverage)
Leverage refers to borrowing money to enlarge the size of transactions and thus control larger trading positions with smaller funds. The purpose of leverage is to increase potential gains, but also increase risk. Leverage can also magnify losses if the market volatility goes in a bad direction.
The basic principles of leverage:
Assuming 10 times leverage, that means you can only invest 10% of your money to control a trading position worth 10 times that money. Investors who use leverage will have to pay a certain amount of margin.
- Margin (Margin): An investor must deposit money in leveraged trading, usually a part of the transaction amount. The margin ensures that you have enough money to cover the potential losses.
Example: If you choose 10 times leverage to trade bitcoin, the current price is $20,000. If you want to open a position and buy a bitcoin contract, you would normally have to pay $20,000. However, with 10 times leverage, you only pay a $2,000 margin to control the $20,000 deal.
- Profit amplification: If the price of Bitcoin rises to $22,000, your profit will be $2,000 (originally 100% of normal times), but with leverage, your profit is magnified 10-fold to $20,000 (excluding margin).
- Loss amplification: If the price of bitcoin falls to $18,000, your loss will be $2,000, but due to leverage, the loss is also magnified to $20,000, which could lead to forced unwinding.
Leverage risk warning: Although leverage can magnify earnings, it also increases the risk of losses. If the market works against you, your losses will be magnified, and you may even lose more than your original investment. Therefore, when using leverage, investors need to have a strong market judgment and risk control ability.
Stop loss and stop gain (Stop Loss & Take Profit)
Stop loss (Stop Loss) and stop profit (Take Profit) are common risk control tools in trading that help investors automatically close positions when market prices are unfavorable, to prevent widening losses or automatically close positions at predetermined profits.
- Stop loss: stop loss is a price set to limit losses, when the market price hits the stop loss price, the system will automatically perform the liquidation operation, to avoid the loss continues to expand.
- Stop profit: Stop profit is a price set to ensure profit. When the market price reaches the stop profit price, the system will automatically close the position and lock in the profit.
give an example:
- You have an extra bitcoin contract, and the current price is $20,000. You set a stop loss at $19,000 and a stop profit at $22,000. If the market falls to $19,000, the system automatically unwind and limits losses; if the market rises to $22,000, the system automatically unwind and locks in profits.
Forced liquidation (Liquidation)
When trading with leverage, forced unwinding is automatically performed by the platform when the margin is low. When the market price fluctuates adversely, making the available margin of the account lower than the maintained margin level, the platform will force the liquidation to prevent losses from exceeding the available funds of the account.
- Trigger condition: When the market price fluctuation makes the account loss to a certain extent, the platform will force the liquidation according to the leverage ratio and the current position.
- Avoid methods: Investors can use margin calls to avoid forced unwinding, or set a stop loss to control risk.
Example: Suppose you open a position with 10 times leverage and use a $1,000 margin to control a $10,000 deal. When the market is adversely volatile and your margin loss reaches a certain percentage, the platform will force you to close your positions to prevent you from losing more than the available funds.
Warehouse and full warehouse (Isolated Margin & Cross Margin)
In leveraged trading, investors can choose different margin models, the common two are position by position (Isolated Margin) and full position (Cross Margin).
- Position by position (Isolated Margin): The margin of each position is managed independently and will not affect other positions. When the loss of a position exceeds the margin of the position, the system will only force the liquidation of the position and will not affect the other positions.
For example: you have opened two different positions on the same platform, one is a long position for Bitcoin, and the other is a short position for Ethereum. If you choose the interposition mode, when the bitcoin position loses money, its margin will be exhausted and trigger the forced liquidation, but the Ethereum position will not be affected.
- Full position (Cross Margin): The margin of all positions shares the same pool. When the loss of any position reaches a certain extent, the funds of the whole account will be used to close the positions to prevent the account from being liquidated.
For example: If you use the full position model and open multiple contract positions in the same account, once a certain position loses money, the other positions will also be used to cover the losses and avoid forced liquidation.
Documentary transactions (Copy Trading)
Documentary trading refers to automatically copying the trading strategies of other successful traders, so that investors can obtain similar trading gains without operating them themselves. Platforms often list the trading strategies of good traders, and investors can choose the documentary order and set the investment amount.
- Automatic documentary: After the order is selected, the system will automatically execute the transaction according to the transaction signal of the selected trader.
- Manual documentary: investors can make appropriate adjustments according to their own judgment on the basis of the documentary.
give an example:
- You choose a single successful bitcoin trader who opens multiple bitcoin positions. You set the $100 investment amount, the platform will automatically based on his trading operations, your account will automatically open the same position, and follow his buy and sell in the same proportion.
Arbitrage Trading (Arbitrage Trading)
A carry trade is a strategy that makes profits by simultaneously buying and selling the difference in the prices of the same assets in different markets. Due to the high volatility of cryptocurrency markets, arbitrage opportunities often exist. Investors can use the price differences between the markets to conduct arbitrage operations.
- Cross-market arbitrage: profit by buying cheap assets on one exchange and selling at a higher price in another trade.
- Cross-currency arbitrage: arbitrage between different currency trading pairs.
give an example:
- On Exchange A, bitcoin costs $20,000, while on Exchange B, bitcoin costs $20,100. You can buy bitcoin on the A exchange and sell it at B at A higher price to earn the difference.
Simulated Transactions (Demo Trading)
The simulated trading function allows users to trade without actual risks, helping beginners to get familiar with the platform operation and master trading skills. Simulated transactions are funded from virtual accounts, and all operations are the same as firm transactions, but no real funds are involved.
give an example:
- New users can open a simulated account on the platform to trade virtual assets such as Bitcoin and Ethereum to simulate the real market environment and master how to use different trading tools.
Regular fixed investment (Dollar-Cost Averaging, DCA)
Regular fixed investment is a common long-term investment strategy. Investors buy certain assets regularly according to predetermined time intervals and fixed amount, so as to avoid excessive one-time investment in market fluctuations, so as to smooth the investment cost and reduce the impact of market fluctuations on investment.
give an example:
- You buy $100 a month on a regular basis, and you buy at that amount, whether the market price goes up or down. In the long term, this strategy helps to help spread market risk and reduce losses caused by short-term price fluctuations.
High-frequency trading (High-Frequency Trading, HFT)
High-frequency trading is used to perform a large number of trading in a very short period of time to capture small fluctuations in the market. Such transactions often rely on powerful algorithms and technical analysis, trading frequently in the short term to making profits.
give an example:
- A high-frequency trading system can complete multiple transactions in seconds, using minimal market price fluctuations to make a meager profit. Such traders often have advanced technical facilities and speed advantages.
sum up:
- Opening: the establishment of a new trading position that can be long or short.
- Closing: end an open position through the opposite operation.
- Leverage: to enlarge the transaction scale through borrowing funds, bringing higher potential returns and risks.
- In addition to basic functions such as opening and leverage, the trading platform also provides a variety of functions to help investors better manage risks, optimize trading strategies and improve trading efficiency. Through the functions of stop loss and profit, forced liquidation, full position by position, documentary trading, arbitrage trading, simulated trading, regular fixed investment and high frequency trading, investors can deal with market fluctuations more flexibly, develop their own investment strategies and protect the safety of funds.
When contract trading and leverage are used together, investors can control larger market risks with smaller capital input, so risk management strategies need to be carefully considered.