- What is contract trading in the cryptocurrency market?
Contract trading, also known as "futures trading," refers to an agreement between investors and trading platforms to buy or sell a certain amount of digital currency at an agreed price at a specific time in the future. Unlike traditional spot trading, contract trading allows for both long (buying) and short (selling) positions, meaning that investors have the opportunity to profit regardless of whether the market rises or falls.
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Characteristics of contract trading:
Leverage effect: Contract trading allows the use of leverage, enabling investors to amplify their investments by borrowing funds provided by the platform. However, the use of leverage can magnify both profits and risks.
Long and short positions: Unlike spot trading, which only allows for long positions, contract trading allows for both long and short positions, enabling investors to choose the appropriate direction based on market conditions.
Leverage multiples
2. How to play in the cryptocurrency contract market
There are various strategies for contract trading; below are some common contract trading strategies.
- Contract hedging strategy
For some beginners, adopting a contract hedging strategy is a relatively stable approach. The core idea of this strategy is to hedge by simultaneously holding both spot and contract positions when the market direction is unclear, thereby reducing risk.
For example, if you hold a long contract for one Bitcoin, you can open a short contract. When the market declines, the loss on the spot asset may be offset by the profit from the short contract. This way, you can maintain asset stability in an uncertain market.
Long and short position hedging - Stop-loss and take-profit settings
Stop-loss and take-profit are important risk management tools in contract trading. In cryptocurrency contract trading, due to significant market volatility, failing to set stop-loss and take-profit levels may lead to amplified losses. Therefore, reasonable stop-loss and take-profit settings are key to stable operations.
Take-profit: Automatically close the position to lock in profits when the market price reaches the preset profit target.
Stop-loss: Automatically close the position to avoid further losses when the market price reaches the preset loss level.
Take-profit and stop-loss - Trend-following operation
Trend-following is one of the most commonly used strategies in contract trading, suitable for situations where market trends are clear. The core idea of this strategy is to operate in line with the mainstream market trend, i.e., going long when the market is in an uptrend and going short when the market is in a downtrend.
The key to trend-following is accurately judging market trends and entering and exiting positions at the right time. Typically, investors use technical analysis tools (such as moving averages, candlestick charts, MACD, etc.) to identify changes in market trends. Once a trend is confirmed, positions can be opened at appropriate price levels. - The most stable ways to trade contracts in the cryptocurrency market
- Control position size and leverage
Stable contract trading first requires controlling the use of position size and leverage. Excessive leverage and large positions can lead to rapid liquidation of funds, even resulting in a margin call. Therefore, novice investors should choose low leverage and control their positions to reduce risk.
For example, beginners can choose 1-5 times leverage, so even if the market experiences significant fluctuations, they can maintain a certain operational space. - Gradual entry and stop-loss/take-profit
Avoiding entering the market with the entire position at once is key to stable operations. Investors can choose a gradual entry strategy, gradually increasing their positions based on market conditions and setting stop-loss points. Gradual entry not only effectively avoids risks from sudden market fluctuations but also diversifies investment costs, improving the break-even point. - Avoid overtrading
In cryptocurrency contract trading, overtrading is one of the common causes of losses. Overtrading is often triggered by emotional actions, such as chasing prices or blindly following trends. Investors should remain rational and avoid making excessively frequent trades due to significant market fluctuations. - Technical analysis and market sentiment judgment
The success of contract trading relies on technical analysis and the judgment of market sentiment. By analyzing market trends, support and resistance levels, and changes in trading volume, investors can more accurately judge market movements. At the same time, being sensitive to market sentiment and avoiding blind following can reduce unnecessary losses.