Spot, Margins and Futures
Table of Contents
- Introduction to spot margin and futures trading
- Why do we have different forms of trading
- How can we use these different forms of trading
- Different trading strategies
- Futures versus spot trading, which one is better?
- When should I venture into futures trading
- Questions and answers
A good number of crypto traders got introduced to crypto because of the dogecoin pump hype or bitcoin mooning or a p2p trading opportunity. They make a lot of money and then learn about the incredible power of futures trading which they can use to turn 1000$ to 100,000$ within a short while. Then they venture into it without learning, using the same mindset that they used in spot trading.
It usually ends in tears with them losing all the money they made from their earlier days when they had beginners luck.
There is also another batch of traders who make a lot of money buying coins during a bull market. During a bull market, prices are going up so majorly, you’ll make money. These traders end up losing it all and becoming destitute and even worse than when they started trading.
The reason is that they don’t know how to make profit during bear markets (when prices are going down).
If you want to be a professional and profitable trader for the long term, you need adequate knowledge on the different types of trading. They are knowledgeable tools you’ll add to your arsenal so that you’ll be properly equipped for any market condition. A professional trader should be able to make money in any market. It's easier to make money in a bull market but whether the market is trending up or down or ranging sideways, if you have adequate knowledge of spot, margin and futures trading, you’ll know how to profit from the market.
What is spot trading?
When it comes to cryptocurrencies, spot trading is the most basic type of trading you can make.
This essentially entails purchasing crypto such as Bitcoin and holding it until the value increases or using it to buy other altcoins that you believe may rise in value.
So basically, what most newbies may know is spot trading which is totally fine.
Margin trading is a method of trading assets using funds provided by a third party.
When compared to regular trading accounts, margin accounts allow traders to access greater sums of capital, allowing them to leverage their positions.
Take note of this key term - leverage
Essentially, margin trading amplifies trading results so that traders are able to realize larger profits on successful trades. This ability to expand trading results makes margin trading or trading with leverage especially popular in low-volatility markets, particularly the international Forex market.
Cryptocurrency market has high volatility so you don't need leverage. If you have lots of funds, you still make incredible profits.
In crypto, you’ll find low cap gems that can up you 10X 100X and so forth.
Who needs leverage when they have got all the volatility right?
Let's proceed to juicy one— Futures
Now futures trading is the real deal. You can trade up to 125X. While margin trading allows you to trade from 1X to about 5 or 10X, with futures trading, you can trade with really high leverage and that means more reward which essentially means more risk.
For example, if I want to trade one bitcoin now, I’ll need 60,000$ to buy it, but if I’m trading with leverage, I can borrow funds from other traders or the exchange.
So if I’m trading with 10X I only need 6000$ to trade 1 BTC which is valued at 60,000$. If I’m trading with 100X I only need 600$ to trade 1 BTC so I’ll place that 600$ in margin.
Margin is the amount you place as collateral in order to be able to trade with leverage.
With futures, you can trade with high leverage which means you expose yourself to more profit, but it also comes with more risk. Besides having high leverage, futures trading differs from spot and margin trading in many ways such that the prices in the spot market and futures market may vary.
There are many types of futures but we won't delve into futures in depth for the sake of this session but just know that futures allow traders to trade with high leverage, and it's a different market from spot market.
When trading spot, you buy/sell the actual asset but when trading futures, you are trading a derivative or a contract of that asset.
So basically, we know that the spot market is volatile but that doesn't mean a trader should be limited to just that type of trading.
One of the best use cases for futures trading in crypto is the ability to open a short position to hedge your long.
Let's say you hold a lot of bitcoin and your Technical Analysis and Fundamental Analysis says that bitcoin is going down, if you don't want to sell your bitcoin, you can open short on futures. What this means is that as bitcoin is going down, you’re making profit. That’s hedging — oversimplified.
Despite the high volatility in crypto, you can use futures trading to:
—trade a large position with small capital
— hedge your long position by going short
—speculate with potential for greater reward
So as a trader you may be asking Futures trading or spot which is better?
It depends on
1. the reason you are trading,
2. your risk appetite
3. your trading capital
4. your trading experience
5. Your trading strategy
Generally, if you’re a newbie, stay away from futures trading as far as possible, stick to spot trading instead of wasting money and time on futures. You can spend that time to acquire as much knowledge as possible and then start futures trading with a demo first.
The early days are for making mistakes so don’t use too much money even if you have a lot of money.
It's almost a given that you will make mistakes as a newbie so it's wiser to make mistakes with small money.
If you have experience trading forex, then futures trading should come naturally to you, you just need to spend a little time understanding the UI on crypto exchanges, position sizing etc.
“BTW if you’re looking for an exchange to trade futures, I recommend OKEx.”
You can claim a free gift of $110 when you register with Toju Kaka's link - bit.ly/okexemecrypto
The kind of trading you do will also depend on your trading strategy. In this context, I’m referring to the timeframe you want to be holding trades.
In descending order, it is as follows:
- Long term HODL/ Investing
- Swing trading
- Day trading
Long term HODL is not even trading, it's more investing. If you want to hold a trade for the long term, spot market is the way to go. For long term HODL, use spot only.
For position, you can use spot and the others.
For swing, day trading and scalping, you can use futures and spot.
Futures trading is best for scalping and day trading because you need leverage to amplify the market volatility and gains.
Different types of trading strategies
Position traders are focused on long-term price movement, looking for maximum potential profits to be gained from major shifts in prices. As a result, trades generally span over a period of weeks, months or even years.
Position traders tend to use weekly and monthly price charts to analyze and evaluate the markets, using a combination of technical indicators and fundamental analysis to identify potential entry and exit levels.
As position traders are not concerned with minor price fluctuations or pullbacks, their positions do not need to be monitored the same way as other trading strategies. Instead, they are occasionally monitoring to keep an eye on the major trend.
Swing traders typically hold positions for several days, although sometimes it could be as long as a few weeks.
Because positions are held over a period of time, to capture short-term market moves, traders do not need to sit constantly monitoring the charts and their trades throughout the day.
This makes it a popular trading style for those who have other commitments (such as a full-time job) and would like to only trade in their leisure time. However, it is still necessary to dedicate a few hours a day to analyze the markets.
Swing traders (as well as some day traders) tend to use trading strategies such as trend trading, counter-trend trading, momentum and breakout trading.
Day traders enter and exit their positions on the same day (unlike swing and position traders), removing the risk of any large overnight moves.
At the end of the day, they close their position with either a profit or a loss.
Trades are usually held for a period of minutes or hours, thereby requiring sufficient time to analyze the markets and frequently monitor positions throughout the day.
Just like scalp traders, day traders rely on frequent small gains to build profits.
Day traders pay particularly close attention to fundamental and technical analysis, using technical indicators such as MACD (Moving Average Convergence Divergence), the Relative Strength Index and the Stochastic Oscillator, to help identify trends and market conditions.
Scalping is the most short-term form of trading. Scalp traders only hold positions open for seconds or minutes at most. These short-lived trades target small intraday price movements.
The purpose is to make lots of quick trades with smaller profit gains, but let profits accumulate throughout the day due to the sheer number of trades being executed in each trading session. This style of trading requires tight spreads and liquid markets.
As a result, scalpers tend to trade major currency pairs only (due to liquidity and high trading volume).
1. What is the least amount to invest in crypto?
Answer - There is a difference between trading and investing. Investing ordinarily is simpler but because humans lack patience, it tends to be difficult. Before you can say you are investing you should be able to leave your asset there for 1 year at least, that's true investing in the strictest sense. If you're starting new, invest an amount you can afford to lose. If you want to trade you need capital. The more your risk the more your reward and it's no different when investing.
2. Can I invest on multiple platforms at a time
Answer - Yes, you can. That's how to do it, don't stick to just one platform.
3. If one opens a position on futures say x100 for BTC, if the loss is to happen will it also go down x100 ?
Answer - yes, more risk = more reward
4. How does one get to have solid grounding in TA and FA
Answer - study, practice and time. There are a lot of free materials online. If you want expert guidance, check out emecrypto.com
5. Can you hedge your positions using futures?
Answer - Yes you can, one way to do that is by going short on an asset.
6. What is Slippage?
Answer - Slippage is when traders have to settle for a different price than what they initially requested as a result of movement in price between the time an order for a crypto asset is made and when the trade is actually carried out. Too much slippage can cost frequent traders a lot of money.
Technical analysis is a quantitative method that aims to make calculated predictions of an asset’s price movements, trying to identify patterns of repeated behaviors. The focus of TA is on the price figures and charts making the assumption that price movements aren't random and are likely to repeat themselves. It’s mostly used by day traders and others involved in short-term trading activity.
With technical tools like Trading view you’ll be able to determine which way the trend is going, whether an asset is overbought or oversold, to what level the asset’s price will fall.
Fundamental analysis is more of a long term approach to be used when trading. The fundamental analysis observes an asset’s perceived or calculated value as opposed to observing past statistics of the crypto asset. Shorting is a trading strategy that speculates on the decline of an asset. This style of trading is risky and is advisable to be done only by experienced traders.
The session on Spot Trading, Margin & Futures was originally anchored on the Obiex community by Toju Kaka, CEO of emecrypto.com.
emecrypto helps traders and investors become better at trading and investing.
Toju Kaka has been in crypto since 2016. He's worked with many crypto firms as a consultant/partner including EOS nation, TokenPocket, OKEx and so on.