Frequently Asked Questions About Derivative Trading
Derivatives trading in the cryptocurrencies involves a mutually agreed-upon contract between a buyer and a seller. This contract involves the trading of certain crypto contracts at a predetermined price and quantity on a future date. The contracts in this scenario are based on crypto assets, such as futures or perpetual contracts.
This market allows traders to capitalize on the price movements of crypto assets. Purchasing or going long on contracts, traders can benefit from the potential increase in crypto asset prices. Conversely, they can also profit from declining crypto asset prices by selling or going short on contracts.
Now, let’s address some of the most frequently asked questions about crypto derivatives.
What Are Crypto Derivatives?
Crypto Derivatives involve an agreement where the buyer commits to buying a specified cryptocurrency (e.g. Bitcoin) at a predetermined price on a future date, regardless of any decrease in its value. Similarly, the seller is obligated to sell the asset at the agreed price, even if its value has increased. This can be highly beneficial for investors seeking to leverage the volatility of the crypto market.
What are the types of orders and when to trade?
Typically, Crypto Derivatives trading is composed of paired buy and sell orders, which together form a single trade. A buy order is used to enter the trade, while a sell order is used to exit. Essentially, when you enter a trade with a buy order, you must exit with a sell order, and vice versa if you enter with a sell order.
For traders on LBank Futures, utilizing tools such as market orders, limit orders, and stop orders can enhance their trading experience. A better understanding of the right trade orders to use is crucial to trade execution, enabling traders to be more adaptable to changing market conditions.
Trading products
Perpetual Swaps and Futures
Perpetual Swaps: Perpetual swaps represent a dynamic trading instrument akin to futures contracts. These swaps are designed to automatically renew themselves before reaching their expiration dates.
Futures: Futures contract is a financial contract to buy or sell an underlying instrument at a fixed date in the future at a specific price. Trading Futures involves buying and selling futures contracts. Crypto futures contracts can be issued on a variety of crypto asset instruments such as bitcoin, ethereum, solana, etc.
Difference between futures and forward contracts.
Forward contracts and futures contracts are types of derivative arrangements involving two parties who agree to buy or sell a specific asset at a predetermined price on a specified future date.
Contracts Delivery: A forward contract typically revolves around a single specified delivery date for the underlying asset. The parties agree upon a specific date for the asset’s delivery. On the other hand, a futures contract offers a range of delivery dates for the underlying asset. Traders can choose from multiple delivery dates, allowing for increased flexibility and accommodating various trading preferences.
Intermediary Involvement: In a forward contract, parties A and B directly engage with each other. They negotiate and agree upon the terms of the contract without involvement from an intermediary. In contrast, a futures contract includes an intermediary known as a clearance house, which operates within a stock exchange. Parties A and B do not interact directly; instead, they each interact solely with the clearance house that oversees the transaction.
What the expiration
In futures trading, the expiry date (or expiration date) is the moment when an open position automatically closes. Traders must make a decision regarding their position before the expiry date approaches, either by manually closing it, allowing it to expire, or potentially rolling it over depending on the contracts being traded.
Upon expiry, a settlement process is initiated by the exchange (LBank Futures) to close out all outstanding positions in the expiring contract.
On futures expiration dates, traders have several options available to them. One option is to close out their position before the contract expires. This is a common practice among short-term traders, who seek to avoid any unexpected market volatility or complications that may arise from contract settlement.
Why should I trade derivatives?
If you have an interest in futures trading, it can offer benefits, especially if you are involved in investment endeavors, seeking hedging opportunities, or aiming to optimize profitability through strategic leveraging of your activities.
One of the most notable reasons to consider trading crypto futures is its increased profit potential. Typically, a trader with a small account balance of $50 could use 10x leverage and borrow $450 to enter a long or short position worth $500. If the trade turns out well, a 10% price change could help double the initial balance of $50 on the account within a very short period.
Additionally, When you’re trading crypto futures, you will have the option to go long or short, meaning you can profit whether the market is going on an upward or a downward trend. You may enter a long position in a bullish market and go short in a bearish market.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
