Basics of Futures Trading
Learn the basics on how to trade Futures on Kwenta
Decentralized Futures on Kwenta allow traders to get exposure to a market without actually owning the underlying asset. Futures are accessible on a derivatives trading platform like Kwenta. Crypto assets trade 24/7, and so do Futures.
Futures traders should familiarize themselves with a handful of essential concepts. These concepts are critical to understanding the power of leverage. Critical points outlined below are essential when dealing with Futures and require traders to know how they affect each trade.
Leverage is the most common reason traders are attracted to Futures and is a capital multiplier. Trading with leverage allows for more advanced trading methods.
For example, to buy 1 ETH on a spot market, you'd need about 1300 USD (at the time of writing). With leverage, you can open the same ETH position with a fraction of the required spot market capital. The higher the leverage a trader uses, the less capital is needed to open the intended position. Leverage is only available when trading Futures.
An initial margin is needed to enter into a Futures position. Initial margin is the percentage of a futures position notional value that must be covered by cash or collateral.
The maintenance margin is the minimum amount that traders need to hold in their margin account to keep their position(s) open. When a traders margin balance becomes equal to their maintenance margin, their position gets liquidated, meaning a total loss of funds in the margin account.
It is important to note that the maintenance margin will directly affect the liquidation price. To keep from being liquidated, it is highly recommended to close your positions before the collateral falls below the maintenance margin.
Futures traders can be forced to exit positions when losses result in their margin balance becoming equal to their maintenance margin requirements. When this happens involuntarily and automatically, losing trades are liquidated.
As the SNX debt pool is the counter-party to every position, Kwenta requires a mechanism to incentivize the market skew to remain balanced (equal long/short open interest). The funding mechanism has been designed to incentivize a balance of open interest on each side of the market. Positions on the crowded side of the market will be charged funding, while positions on the uncrowded side will receive funding. Funding rates can have unfavorable effects on a traders position. For instance, funding rates may surge when the market is consistently moving in the same direction as a traders position, making it costly for traders to hold long-term.
Isolated Margin is the margin balance allocated to an individual assets contract. Isolated Margin mode allows traders to individually manage their risk and collateral made available to individual positions/assets.
- Trading Futures allows one to profit from both the up and downside of an asset.
- Futures allow for the use of leverage. This is the most sought-after advantage as traders can execute orders at a lower cost compared to the matching spot market price.
- It allows for advanced trading methods.
- The high volatility in the crypto space can be a blessing or an agony. Market movement is something no one can guarantee. Due to the leverage involved, Futures is one of the most challenging trading tools. Traders, in turn, should trade them with a strong risk management strategy.
- Futures allow a trader to speculate on asset prices. Becoming familiar with the basics of Futures is a must. Futures trading can be lucrative if you apply risk management to avoid non-proportional losses.
In short, you should strategize and do your research before trading Futures and understand both their advantages as well as their risks. Trading Futures can result in significant financial loss, keep this in mind at all times:
Never invest more than you can afford to lose!