When trading cryptocurrency futures, you need to be aware of some very important aspects so as not to put your funds at unnecessary risk. For traders just starting out, it’s essential to know the terms that are commonly used in the industry. In this Binance list, the 7 key elements of trading are compiled.
One of the reasons people often fail in digital currency trading is that they do it in an improvised way. In other words, opening an account with a broker, placing funds and trading without considering the factors involved. This is the surest path to failure in any type of financial trading, including cryptocurrencies.
The main advice for those intending to engage in this activity is to take it seriously. This is not a gambling game or a distraction fueled by greed to become a quick millionaire. On the contrary, take it as a job. In other words, give it all the attention, dedication, study and preparation it deserves to achieve real results.
Why is it important to study before trading cryptocurrency futures?
As you might guess, trading bitcoin futures or other cryptocurrencies is an activity that can involve significant risks. In other words, the possibility of losses will always be present. The aim of traders is to reduce it as much as possible.
To do this, there are 7 terms that people who want to get started or are new to crypto trading shouldn’t overlook:
– Funding rate.
– Open interest.
– Volume.
– Leverage.
– Initial margin and maintenance margin.
– Liquidation.
– Insurance fund.
It is important to deal with terms in both languages, but mainly in English, for two reasons. The first is that some brokers are offered in English by default and without translation. The second reason is that most of the best study and preparation materials are in English. So having these concepts at your fingertips in English is the first major advantage going forward.
In what follows, there will be a brief review of each of these terms that are essential when trading cryptocurrency futures.
Funding rates, open interest and volume
Funding rates: these are the payments traders make or receive based on the direction of their trades. They are calculated on the basis of interest rates and premiums (Interest Rate and Premium).
They provide a measure of market sentiment. In this sense, if financing rates are high, it indicates a bull market and vice versa.
Open interest: This is the total number of open trades by traders. This is a very valuable tool, as it indicates the number of open trades in real time. It is based on the sum of all open trades and subtracts closed trades.
By tracking this index, it is possible to obtain a complete picture of the scale of funds entering or leaving the market. As more money enters the market, open interest increases, and vice versa.
Volume: This is a similar measure to the previous one. It is a measure of the number of individual units of an asset that are traded. So, when a trader opens a new trade, this information is added to update the volume.
A useful aspect of volume is that it measures market strength and therefore the level of volatility.
The danger of being liquidated
The first three terms for trading cryptocurrency futures are mainly based on analyzing the market before investing. We will now review some of them, which relate to when the trade is opened:
Leverage: this is a tool that can be useful and give great profits. At the same time, it can be terrible if used irresponsibly. When you open a trade, you can play with the level of leverage. The higher the leverage, the more upward movements in the asset price, the greater the profit. The same applies in the opposite direction.
Caution should always prevail when using this tool. Beginners are advised not to exceed 5x.
Initial margin and maintenance margin: The first of these two terms, initial margin, is a percentage of the amount to be placed on a given position and is closely linked to the leverage placed on it. The maintenance margin, on the other hand, has the same basis as the first, but is not dependent on leverage.
Liquidation: The sixth term people need to consider when trading cryptocurrency futures is the dreaded Liquidation. To get an idea, this term is equivalent to hell in theology. To liquidate one’s account is to lose all deposited funds. This can happen when leverage is manipulated irresponsibly.
Insurance fund
The last of these terms is Insurance Fund. Its role is simple: to protect traders against large losses. In simple terms, some irresponsible traders suffer losses in excess of the funds they hold, generating pooled losses.
The function of this fund is to prevent traders who operate responsibly and profitably from having to pay for the mistakes of those who don’t. Without a broker with a well-capitalized insurance fund, you can trade with peace of mind, as there is no risk of common losses.
Once you know these 7 key terms for cryptocurrency futures trading, the next task is to study them individually, one by one. This will give you the level of knowledge that will enable you to assess the benefits and dangers before investing capital in this market.
This is all the more important as the cryptocurrency market is often extremely volatile.
