This article came directly from HitBTC, at https://blog.hitbtc.com/why-trade-perpetual-futures/
Perpetual Futures is a versatile instrument that can be used together with margin and spot trading to achieve better trading results or, separately, as a profit-driving strategy. Typically, traders choose perpetual futures to:
- Get an additional hedge (protection) to manage their risks in spot and margin trading when the market moves against their active orders and open positions;
- Use a high leverage (up to x100) that allows traders to open positions exceeding their account balance; or
- Open short positions for assets they don’t own (for example, if BTC/USDT price is falling and they don’t own any BTC)
Mark Price – Recent Asset Index Price adjusted by the fair basis value.
Index Price – Average price of an underlying asset on major exchanges.
Funding Rate – Percentage of the contract’s value paid at the end of the current funding interval.
Countdown – Time before the next funding cycle.
Unr. PnL – Estimated profit or loss that you will receive if you close your position now. It includes fees.
PnL – Realized profit or loss of a position based on trades related to the position.
Margin – A Margin allocated per position. Fundings are added and subtracted from the Margin. We use an Isolated Margin to give traders the means to control the risk levels of their positions. Isolated Margins enable them to add or remove assets that serve as collateral for a selected position, effectively altering the leverage of that position.
Required Margin – the amount of margin that must be maintained in the margin balance of a particular instrument to back an opened position.
Available Margin – additional collateral available to open new positions. It is calculated using the following formula: Available Margin = Margin Balance – Required Margin. If multiplied by Leverage, one will arrive at the Buying Power. You can retrieve Available Margin, but then the liquidation price of your position will change in a way that will bring the liquidation of your position closer.
Liquidation – If an asset price on the market (Mark Price) crosses the Liq. Price for a certain contract, this contract will be liquidated.
Maximum position – calculated using the following formula: Lbp=(a/m)^(1/(b+1)), where b = limit power, a = limit base, and m = margin in the position. The smaller the leverage, the bigger the size of a position that can be opened on this contract.
Risk – An indicator of a Position Risk level.
0% – 49%: you can still increase your position size.
50% – 79%: you cannot increase your position size any further.
80% – 99%: (margin call) you can only open orders to close the position or add more margin to reduce the risk of the position’s liquidation.
100%: your position gets liquidated automatically.
The Margin Balance that was available to cover the losses when trading on margin is depleted.
Market order – an order to buy or sell a given instrument at a market price. Market price is defined as the best available price for the instrument at the moment when the order is placed. Since the price changes in real time, the total and fee are provided as estimates rather than exact values.
Limit order – an order to execute a transaction only at a specified price (the limit) or better. A limit order to buy would be at the limit or lower, and a limit order to sell would be at the limit or higher. Limit orders are used by investors who have decided on the price at which they are willing to trade. There are 5 types of Limit orders available for futures trading:
lasts until the order is completed or canceled.
automatically expires if not executed on the day the order was placed. A day ends at 00:00 UTC.
automatically expires at the specified date and time
must be executed immediately in its entirety; otherwise, the entire order will be canceled (i.e., no partial execution of the order is allowed)
must be executed immediately. Any portion of an IOC order that cannot be filled immediately will be canceled
Scaled order – a set of multiple orders to buy or sell, automatically distributed within the user-determined price range (from minimum to maximum price). An amount may have flat, upscale, or downscale distribution.
Opening a long position
If a trader expects the price of the contract to go up, he or she opens a long position. Traders can make profit either on short term fluctuations in price or on a long-term steady growth.
It is important to consider the Funding payment, which takes place every 8 hours, when you will either receive or pay the Funding, depending on what position you hold (long or short) and the recent market movement. You will need to take this into account when developing your long-term strategy.
Another factor that needs to be kept in mind is that if you already have an open position, for example, Long ETH/USDT, and would like to open another Long ETH/USDT position, your second position will just be added to the existing one. The general rule is that you can only open 1 long and 1 short position per contract.
Please note that if you choose to close your position, you will be closing it at the current Market price. If you do not wish to close your position in real time, you can set a Limit order beforehand, so when the contract reaches a certain price, it will be closed automatically and the profit will be credited to your account.
You can also partially close your position as the price rate of your contract changes by creating opposite side orders that will be executed at different price levels. This enables you to lock in your profit without closing the whole position and gives you control over the price of your contract at key market price points.
Opening a short position
If a trader expects the price of the contract to go down, he or she opens a short position. When the price of the contract goes down, you can close it (open a long position) and make a profit on the difference in price. This can be used as a short-term strategy around price fluctuations or as a long-term, if you expect the price of the perpetual futures contract to go down. You don’t need to have the underlying basic asset to open a short position.
In the futures market, the Funding payment, which takes place every 8 hours, applies to both short and long positions. You will either receive the Funding or pay it, depending on what position you hold (long or short) and the recent market movement. You will need to take this into account when developing your long-term strategy.
Please note that if you choose to close your position, you will be closing at the current Market price. If you do not wish to close your position in real time, you can set a Limit order beforehand, so when the contract reaches a certain price, it will be closed automatically and the profit will be credited to your account.
You can also partially close your position as the price rate of your contract changes by creating opposite side orders that will be executed at different price levels. This enables you to lock in your profit without closing the whole position and gives control over the price of your contract at key market price points and when you are away from the terminal
How to change leverage
You may set the needed leverage in the Add/Retrieve Margin pop-up, when transferring the Margin collateral for the contract you plan to trade.
If you already have an open position, you may increase or decrease the leverage by clicking on the Margin +/- button and simply adding or retrieving some margin to this contract. The leverage of all open positions will change.
Increasing the position leverage reduces the exchange’s requirements for the required margin, but on larger leverages there are greater restrictions on the maximum position size.
Parameters to pay attention to
UrlPnL – unrealized profit and loss. This parameter shows the profit and loss the trader will receive if he or she chooses to close the position at the market price.
Liq. Price – when Mark price reaches Liq. Price, the position will be liquidated automatically (for example: a trader expected that the price of the BTC/USDT contract would go up, but it went down). The higher the leverage the trader uses the smaller the change in market that can cause a Margin Call.
Risk – this parameter shows the level of risk for a certain open position. The closer this value is to 100% the higher the probability of this position being liquidated.
Required Margin – this parameter shows the amount of margin you need to maintain in the margin balance of a particular contract to back your open position. This value may change depending on the market value of the asset and your margin balance for a particular contract. If you do not have sufficient required margin, your position gets liquidated.
How to avoid liquidation?
The following indicators show that your position may be liquidated soon:
- Mark price is approaching Liq. price
- Risk is approaching 99%
In order to avoid liquidation, you can:
- Сancel orders, if there are any, because they are tying up the collateral;
- Partially close your position to reduce the amount of Required Margin needed;
- Add more margin to back your position;
- Reduce your leverage to lessen the impact of the market on your position; or
- Set a limit order beforehand, for when the Mark Price approaches the Liq. Price
If you are only just getting started trading futures, use smaller leverage and add more margin to get to know the mechanisms and instruments available. This will allow you to reduce the risks as you are learning to trade perpetual futures.
Let’s look at some numbers
John decides to open a long position with BTC on the spot market. He puts $10,000 into BTC at $55,000.
To hedge his play, he also decides to short BTC futures, also for $10,000, but because of the x20 leverage, it only takes him about $500 to get into that position.
In 8 hours, BTC value went down to $53,000. His current position stands at $10,000 x 53,000/55,000 = $9,636 on the spot market
$500×20 x 55,000/53,000 = $10,377
He can close his short position to put against the reduced spot portfolio. The hedge helped John during this transaction and he can now assess what he wants to do next while maintaining his portfolio value.
John also paid the Funding with 0.01% Funding Rate as his short position went along with the market. You can read more about it on our page.
Futures can be that one additional instrument to open up new opportunities for trading; however, it is important to assess the advantages and disadvantages they offer and carefully weigh them against personal risk management strategies to ensure a comfortable and worthwhile path forward.
- The long and short versatility that futures offer can enable you to act within the market trends in real time, allowing you to benefit from the volatility of the market.
- You can change the risk level of your strategies by using futures to protect from negative and unpredictable impacts of the market.
- A great tool to hedge your portfolio, without directly impacting the existing strategies.
- If correctly calculated and timely performed, traders can earn by collecting fundings that are paid out every 8 hours.
Important factors to consider
- Futures are directly linked to the underlying assets, so the movements within those assets still give exposure to dangerous and unpredictable market scenarios.
- Exposing significant parts of your portfolio to high leverage plays can be threatening to your position as market movements that play against your strategies can harm your position multifold.
What should you do?
Futures is an advanced instrument that comes with pros and cons, but carefully integrating it into an existing trading and investment strategy can give a trader extra flexibility and potential and allow for a more fulfilling experience.
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This article came directly from HitBTC, at https://blog.hitbtc.com/why-trade-perpetual-futures/