Stick to the plan: Developing a Structured Futures Trading Approach
Crypto futures trading offers an exhilarating opportunity to diversify your portfolio and amplify profits, but simultaneously, it comes with inherent risks. Blindly diving into this volatile market without a plan can lead to disaster. A robust and strategic approach is paramount to achieve success in crypto futures trading. A meticulously drafted trading strategy not only provides a clear roadmap but also helps cultivate the crucial attribute of discipline.
With a comprehensive strategy in place, you can make informed decisions based on data and technical analysis, steering clear of the pitfalls of FOMO, emotional impulses and speculative tendencies. In this guide, we emphasize the importance of building a solid trading strategy and how to stick to one effectively, regardless of erratic market movements.
Exploring Futures and Perpetual Swaps
Futures and perpetual swaps represent two key categories of cryptocurrency derivatives. Futures contracts enable buyers to commit to acquiring an underlying asset, such as Bitcoin, at a predetermined price on a future date. By purchasing a futures contract, traders can take a long position and stand to gain from a rise in the asset’s value. Conversely, they can choose to sell a futures contract and assume a short position, profiting from a decrease in price.
In contrast, perpetual swaps function similarly to futures contracts but lack an expiration date. Consequently, traders can maintain their positions indefinitely as long as they have adequate funds in their accounts to support them.
Creating a Trading Style
To establish effective trading goals, it is crucial to adhere to the SMART principle, which stands for specific, measurable, attainable, relevant, and time-bound. Instead of a simple linear plan focused on one of these alone, a trading goal should encompass all of these elements. Furthermore, it is essential to determine your trading style, which should align with your personality, risk tolerance, and time commitment.
With this in mind, there are four primary trading styles to consider:
- Day trading: Day traders execute a small number of trades within the same day and avoid holding positions overnight. This strategy minimizes certain costs and risks associated with overnight exposure.
- Scalping: Scalpers place multiple trades throughout the day, typically for seconds or minutes, aiming to accumulate small profits that ultimately turn into substantial gains.
- Position trading: This approach involves holding positions for extended periods, ranging from weeks to months or even years, with the anticipation of long-term profitability.
- Swing trading: Traders adopting this style hold positions for several days or weeks to capitalize on medium-term market movements.
Developing a Structured Trading Approach
- Define a Budget
Defining and allocating a budget for your trading portfolio is essential as it helps create your individual trading style and risk tolerance. The rule of thumb is to only ever aallocate a portion of your portfolio ranging from approximately 1% to 5% on any given trading day. If you happen to incur losses equal to or exceeding this amount, it is wise to exit the market and take a break. Sometimes it’s better to regroup and prepare for another day rather than persist in unfavorable market conditions.
- Assessing Risk Tolerance
Risk tolerance refers to a trader’s ability to withstand varying levels of risk in their trading activities. It plays a pivotal role in shaping the trader’s chosen trading strategy. It is important to regularly evaluate your risk tolerance, especially when faced with financial or lifestyle changes that might impact your trading decisions. For short-term positions, it is advisable to consider time-based risk tolerance to develop an optimal trading strategy. Long-term positions can accommodate higher risk levels, allowing investors to identify trading opportunities during market volatility.
Conversely, for short-term investments, it may be prudent to tolerate lower-risk asset classes that promote diversification in the portfolio, minimizing losses and safeguarding gains. Limiting risk exposure to the lowest possible level allows traders to safeguard their capital and mitigate the extent of potential losses.
- Utilizing Technical Analysis
Technical analysis serves as a valuable tool in identifying trading opportunities and potential risks before executing a trade. By employing technical indicators such as the stochastic oscillator, on-balance volume, and relative strength index, investors can assess market movements and generate signals for optimal entry and exit points.
- Determining Entering Strategy
An example of a typical entering rule could be formulated as follows: “If signal A is triggered, and the minimum target is at least three times larger than my stop loss, and we are at a support level, then consider purchasing X contracts at this point.”
- Determining Exit Strategy
Before entering a trade, it is crucial to establish exit rules. Each trade should have at least two possible exit points. Firstly, determine your stop loss, which should be documented and not solely reliant on mental notes. Secondly, establish a profit target for each trade. Once this target is reached, consider selling a portion of your position. If desired, you can then adjust your stop loss for the remaining position to the breakeven point.
Traders should implement a well-defined trading plan to establish a clear framework for navigating the futures markets. Maintaining discipline and discovering what works best for you is key. It is recommended to read our comprehensive trading guide on building confidence in trading. Regularly track your progress in a trading journal and review your current trading plan, making necessary adjustments as required.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.