Crypto Futures: 5 Trading Terms Every Trader Should Know (Part 2)
In this segment of the Crypto Futures Trading Terms series, we will delve into five additional essential terms that are crucial for anyone venturing into crypto futures trading. Building upon the key terms we covered in part one, such as leverage, liquidation, volume, funding rate, and open interest — we aim to enhance your trading experience by introducing more terms that will simplify and better your understanding of the market.
Let’s dive right in and discover these terms that will make your trading journey smoother and more understandable.
5 Crypto Futures Trading Terms
- Trading Pairs
When exploring the LBank Futures trading platform, you may have come across various trading pairs such as ETH/USDT, DOGE/BTC, BTC/USD, and many others. But have you ever wondered what these crypto trading pairs represent and how they are interpreted? Trading pairs essentially involve assets that can be exchanged for one another on a specific exchange. For example, BTC/USDT (bitcoin/tether coin) and ETH/USDT (ether/tether coin).
In essence, a trading pair in crypto signifies a combination of two assets that can be traded with each other on a crypto exchange. For instance, a BTC/USDT trading pair allows individuals to buy BTC tokens using USDT tokens and then sell those BTC tokens later to receive USDT in return. The trading pair serves as a reference point for trading one cryptocurrency against another.
In crypto futures, traders can speculate on the price of these assets without actually owning them. This innovative approach allows traders to buy or sell a specific cryptocurrency asset at a predetermined price and date in the future.
2. Initial & Maintenance Margins
In simple terms, the initial margin represents the minimum amount of funds a trader needs to deposit with their broker to open a trading position. On the other hand, the maintenance margin is the minimum balance required in the trader’s account to keep their position active, usually ranging from 50% to 75% of the initial margin.
For example, suppose the initial margin requirement for trading a single Ethereum futures contract is $2000, and the maintenance margin requirement is $1500. If the balance in the trader’s account drops to $1500, it falls below the maintenance margin level. In such a case, the trader will receive a “Margin Call” from their broker, notifying them about the low margin balance.
To restore the account back to the initial margin level, the trader must deposit additional $funds. However, suppose the trader fails to respond to the margin call promptly or lacks the necessary funds to bring the account back to the initial margin requirement, in such a case, the exchange has the authority to liquidate the trader’s position.
3. Insurance Funds
Insurance funds are like financial parachutes that shield insolvent traders from adverse losses and guarantee that successful traders receive their full profits. Their main objective is to mitigate unforeseen losses incurred through leveraged trading. These funds serve as a safeguard to prevent traders from plunging into bankruptcy during liquidation events.
They function as a protective barrier against contract failures in leveraged trading and are utilized to compensate traders who fail to act promptly in safeguarding their open positions from bankruptcy. Typically, insurance funds are funded through exchange fees, liquidation penalties, or alternative mechanisms.
4. Contract expiration
Crypto futures contracts are financial instruments that derive their value from underlying cryptocurrencies like Bitcoin, Ethereum, or Dogecoin. These contracts have a predetermined expiry date, which marks the conclusion of the contract. In simpler terms, contract expiry refers to the moment when the specified duration of the contract is reached and its time has elapsed. A contract’s expiration date signifies the final day on which trading of that contract is allowed. Usually, this date falls on the third Friday of the expiration month, although it may vary depending on the specific contract.
5. Position Limits
Position limits refer to the maximum number of contracts that a market participant is allowed to hold, specifically in the context of futures contracts. These limits serve as a restriction on the number of buy or sell contracts that a speculator can possess at any given time. As the delivery period nears, exchanges typically require participants to reduce their position limits.
In addition to position limits, exchanges often impose restrictions on the daily price movement of futures contracts. These restrictions, known as limit up and limit down, dictate the maximum price increase or decrease allowed within a single trading day. If market prices reach these limits, trading may be temporarily halted or ceased entirely for the day. While some position limits may be set too high for individual traders to attain, they play a crucial role in maintaining stability within financial markets. They prevent large traders, groups of traders, and investors from manipulating market prices and utilizing derivatives to gain control over the market.
To illustrate, let’s consider the trading of the PEPE/USDT contract on LBank. Traders can establish significant controlling positions in this contract without acquiring the actual assets. If these positions become substantial, they have the potential to introduce heightened volatility in the markets.
Wrapping up
Developing a solid comprehension of the prevalent terminology utilized in the crypto futures market is instrumental in navigating the process effectively and minimizing potential risks. In the third installment of the “Trading Terms Every Trader Should Know” series, we will present a new set of five key terms to note.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
