What are Futures and How to Trade Them?

Ever wondered what are futures and how to trade them on Binance? Then let’s guide you through the whole process.

You’ll get to know what futures means, how it works, and simple steps to make a profit while trading the futures market.

If you’ve traded on Binance, Bitmex, FTX, Kucoin, Kraken, and other cryptocurrency exchanges, you may have seen an option to switch to perpetual futures.

But if you didn’t know what to do with this feature, that can be a thing of the past thanks to our detailed outline on futures contracts in crypto.

Ready?

Let’s dive in.

What Does it Mean to Trade Futures?

Futures in crypto can be likened to leverage trading!

We’ll explain – but to give a better understanding of the futures market, we’ll compare it to the spot market.

When you’re spot trading, your profit or loss is calculated based on the percentage the cryptocurrency you’re holding has spiked or devalued.

For instance:

If you buy $100 worth of Ethereum and the asset spikes by 10%, you now have $110. In this case, your $100 capital has grown by 10%.

Contrastingly, leverage trading multiplies this percentage by a certain number or leverage size.

You can choose numbers between 1 to 125 (the range differs depending on the exchange).

This means that if you choose a leverage size of 5, a 10% move in Ethereum’s price will lead to a 50% gain or loss on your trading capital.

The same way a leverage size of 10 will give you a 100% profit or loss on your capital.

But that’s not all, let’s throw more light on what exactly is your capital on futures.

How Does Futures Work?

Recall that futures deals with leverage trading.

However, it takes it one step further by enabling you to trade with more money than you actually have.

Here’s what it looks like:

If you have $100 to trade with and you choose a leverage size of 5, this means you’re actually trading with $500 (100 multiplied by 5).

But where does the extra cash come from? You may be wondering.

The cryptocurrency exchange you’re trading on lends you the extra $400 or any other amount depending on your leverage size.

Impressive right?

So, for every percentage move on Bitcoin, Ethereum, or any other crypto you’re trading on futures, your $500 (which is actually $100) is used as a yardstick.

The difference between a spot trader and a futures trader, in this case, is that:

The former needs exactly $500 trading capital in their wallet to benefit from even a 1% move in price whereas a futures trader with $100 gains the same benefit as a spot trader with $500 capital.

It can, therefore, be said that futures is an advanced form of spot trading! Nonetheless, you’re buying contracts not an actual coin like on spot.

But let’s keep things simple.

Other things to note about futures trading are:

  • You’re able to open large position sizes even when you have very little capital to trade with.
  • You can make money whether the market spikes or dips since you’re able to long and short.
  • Futures trading is quite interesting and enticing but it comes with a very high risk. You can lose a significant part or all of your capital if you get liquidated.

Tips to Consider While Trading Futures

It is important to be armed with the best futures trading tips even before diving into this market.

This is because futures trading is very risky. You can lose your entire capital unlike spot trading and regular leverage trading.

With that in mind, here are some tips for futures trading to guide you:

1. Master the Art of Trading:

Most new traders want to dive into futures and that often comes with a repercussion.

Little knowledge and less experience in trading makes it more difficult to navigate the futures market.

Therefore, master the art of trading even before you make up your mind to start trading futures. Our guide on how to read candlesticks like a pro will prove useful here.

Keep in mind that knowledge and experience is not only measured by how long you’ve been trading but how many profitable trades you’ve made within that time.

2. Trade with Your Spare Money:

So, you’ve been trading profitably for some months or years now and you’re confident futures is for you.

The next step is to ensure you start with a very small amount.

This amount can be $10, $20, etc. and if you’re able to grow the capital significantly and consistently, you can gradually increase it.

We’ll like to place more emphasis on consistent profit making so you don’t turn into a gambler.

Note down how many wins and losses you’ve had and how consistent either of them were.

3. Master Risk and Portfolio Management:

You must learn to take your losses early as a futures trader to avoid huge losses or liquidation.

One way to cut losses is to use a stop loss.

In line with that, close your position once the market is going against your analysis instead of waiting in hopes that’ll reverse.

One more way to manage your risk is to stick with small leverage sizes (between 2 and 10) to give your trade more room to breath.

This is because the higher the leverage size you use, the larger your margin and closer your liquidation price.

Thus, no matter how rosy the market looks, don’t get tempted to use a leverage size of 25 or higher.

Portfolio management, on the other hand, focuses on how many trades you’ll open.

It’s better to open fewer trades to enable you monitor them easily.

You also need to know how much you’ll allocate to each trade from your main capital.

For instance:

If you have a $100 capital, you can open two trades with it and use not more than 10% ($5 each) of your entire capital on both trades.

4. Trade with Lower Timeframes:

You may be more profitable as a futures trader when you trade with lower timeframes.

This is because the crypto market is very volatile, hence, you can run into profit and losses within a matter of minutes or hours.

The profit you’ve gained is also not yours not until you’ve closed a position.

That being so, use time frames between m5 to m30 to scalp the market.

5. Choose Between Cross and Isolated Margin:

Cross and isolated margin have their advantage and disadvantage, hence, you need to use one that leaves you more profitable at the end of the day.

Cross margin means your entire trading capital is exposed to the market and as such, you can lose everything in your wallet if things go south.

Its advantage lies in the fact that your liquidation price will be farther compared to when you use isolated margin.

If you settle for a cross margin, ensure you don’t use more than 20% of your entire capital to trade.

Isolated margin, on the other hand, allows you to put only a certain amount of your capital in a trade, thereby protecting the remaining capital.

Its disadvantage is that your liquidation price will be close to your entry price unlike when you use cross margin.

This type of margin is advisable when trading highly volatile pairs that grow exponentially within seconds.

Want to know what these highly volatile assets are? Check out our guide on the best cryptocurrency to invest in and why.

How to Trade Futures

Now that you know the basic steps to guide your futures trade, let’s show you how to do it.

We’ll be using the Binance cryptocurrency exchange as an example.

Here are the simple steps on how to trade futures:

  • Create an account on Binance.com if you haven’t before this time. If you’re in the US, go to Binance.us.
  • Download the Binance app from the official website to make it easier to manage your trades.
  • Login in to your account on the app and complete the setup requirements.
  • Fund your Binance account with Bitcoin or USDT.

Note that Binance supports USDT-margined futures and Coin-margined futures.

USDT-margined futures means you’ll be using USDT to trade with Bitcoin or altcoins and your profit will be in USDT or BUSD. This makes it easier to calculate your profit or loss.

Alternatively, you’ll be trading with crypto and getting your profit in Bitcoin or altcoin if you opt for Coin -margined futures.

We’ll be using USDT-margined futures in this example.

Now Transfer USDT from your Binance Spot wallet to Futures Wallet. To do this,

  • Click on Transfer
  • Set ‘Spot wallet’ at the top and ‘USDT-M Futures’ below it
  • Select ‘Transfer’
What are Futures and How to Trade Them
  • Click on the ‘Futures’ menu at the bottom of the app
What are Futures and How to Trade Them
  • Set the tab to ‘USD-M’ or switch to ‘Coin-M‘ if you’re trading with crypto
  • Click on the coin’s name tab to make a selection for the asset you want to trade
What are Futures and How to Trade Them
  • Search for a Token in the ‘All’ tab (for instance Eth/USDT)
What are Futures and How to Trade Them
  • Choose between cross margin and isolated margin, then click on ‘Confirm’
  • Set your leverage size
  • Select the ‘Buy’ tab if you think the price of the token will surge or choose the ‘Sell’ tab if you think the price of the coin will dip.
what are futures and how to trade them
  • Enter the price you want to long or short the coin
  • Choose how much of your capital you want to open the position with
  • Click on Buy/long or Sell/short
  • You can also edit the trade to enter your take profit and stop-loss price.

There are two options you can use to close your position and these are market order and limit order.

When you choose market, your trade is closed immediately at the current market price.

Nonetheless, you might lose some of your profit since the coin’s price may have changed before you hit the ‘close position’ button.

A limit order allows you to set the closing price of the asset and therefore, you get to determine how much profit you’ll be walking away with.

PnL denotes your profit and loss on a position, however, that profit/loss is only yours when you close a position.

Therefore, your profit can turn into a loss and your loss into profit.

Conclusion

Now that you know what are futures and how to trade them, do a bit of practice to see how well you’ll master the art.

Remember to start small and put risk & portfolio management in place.

Most importantly, know when to leave futures trading entirely especially if you’re running into losses consistently.

Spot trading may offer less profit but it is less risky, thus, your major trading activity should be on spot and not futures.

19 thoughts on “What are Futures and How to Trade Them?”

  1. Thanks for the well detailed guideline. I’ve lost count on the number of times I got liquidated all because I didn’t have prior knowledge on futures trading before starting. I’m willing to try again even if it’s with $5. But would you advice i close my trade when I don’t see returns on time?

    1. MUIDEEN OLAWUMI

      If your analysis is still in play,then you should Hold if you have used a good leverage though. But if the chart is moving against your analysis,then you have to cut your risk and this is part of what is assumed to be proper risk management.

    2. You’re welcome, Jerry.

      Sorry about the losses and hope you put better risk management in place to curtail these losses.

      A great thing you’ve not given up entirely on futures trading and starting small is always advisable.

      These aside, you can still leave your position open if you’re not running at a loss. But keep in mind that you’ll be paying more fees the longer your position stays open.

  2. Ezebuala Ebuka

    Thanks for the guideline. But I’ve been wondering, when trading futures if I should follow the perpetual chart or the normal chart. What chart would you advise i follow?

    1. You’re welcome Ezebuala.

      The perpetual chart is better since the price may differ slightly from the regular chart. You need to know the exact price to buy and sell on futures since every cent counts especially when you’re using high leverage.

      Nonetheless, it’s the same price action you’ll see on both charts.

  3. MUIDEEN OLAWUMI

    You have really done a great job with this write up more grease to your elbow.
    As they always say that “Futures to village is 0.005kobo🤣🤣😂🤣”. The important point before diving into futures trading is proper TA knowledge and good Risk management.

    1. Hi Muideen,

      Thanks for the contribution.

      Most certainly, risk and portfolio management is key to mitigating risks while trading the futures market.

  4. Wow, this is very detailed and educative. But I have a question please; i Longed EOS at $6.4 with a LP @ $2.1. Now EOS is trading at $3.8( that’s over 60% in loss).
    With the current market behavior, please what do you think i should do?

    1. Hi Moh,

      It’s always advisable to cut your losses early but given that the losses have compounded already, that’s out of the way now.

      Despite a 60% loss, you haven’t lost entirely which means you can save what’s left.

      The current market looks more bearish than bullish.

      The final decision lies with you.

  5. Thank you for this wonderful and detailed lesson on futures but then my question here is as a beginner what leverage use is more advisable and does leverage here is what you’re referring to as isolated and cross margin?

    1. You’re welcome Ridwan.

      A leverage size between two and five is most ideal for a beginner who’s just starting out futures trading.

      On the other hand, cross and isolated margin are just the margin allocation modes you can select from. As mentioned in the post, an isolated margin restricts how much your position is open to.

  6. Very enlightening post, I think it’s easier when one knows and master TA very well on spots before going on to trade futures though if not you will just learn the hard way…

    1. Thanks for the insight Avinci.

      Knowledge and experience is key to thriving in a highly volatile market.

  7. Kingsley onyekachi

    I found this note educative, this knowledge is can be said a prerequisites for trading since it give one a first understanding of what future trading is before practicalizing it, even though future trading is for the expirenced traders but the other needs to practice with few Dollar,to get better someday

    1. Hi Kingsley,

      Thanks for the feedback.

      We agree with you that practicing before actively trading futures is ideal.

  8. Very enlightening material, It highlights how proper risk and portfolio management is the core principle of futures trading.

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