- Understanding the basics of Futures trading and leverage.
- Highlighting some of the top mistakes made by Futures traders in the market.
- How to avoid those futures trading mistakes and improve upon them.
Introduction to Futures Trading in Crypto
Futures trading in the crypto market has exploded in recent years despite it being a newer concept in this industry, thanks to a number of reasons. Crypto Futures as a concept came into the market for the first time in December 2018 when the Chicago Mercantile Exchange (CME) launched Bitcoin Futures trading for the first time.
Futures is essentially a system where the investor or trader owns a contract and not the actual underlying asset, like Bitcoin in this example. Here, the investor or trader possesses the Futures contract of the crypto asset while the custody of the actual asset and the settlement is handled by the Futures exchange.
Recently it has become a very popular method employed by large-scale institutional traders and investors and also retail ones to stay invested in crypto assets without having to go through the hassles of buying and storing these assets safely in their custody. Crypto Futures also solve several other problems like taxation of profits or losses generated from it or even worrying about liquidity while attempting to sell. It also has the added benefit of providing the opportunity for investors to take up short positions on crypto if they think the value might go down and profit from the difference.
Top Mistakes made by Futures traders
While Crypto Futures as a concept has been around for a very long time in the world of traditional finance, it is still extremely new in the crypto industry. Thus there is a natural lack of hands-on experience in the matter and need traders in this industry who haven’t had exposure to traditional Futures markets can tend to make some mistakes that are common in this kind of speculative activity. Here are the top 7 mistakes that traders should avoid:
- Trading without a plan
- Trading without stop-losses
- Not understanding the risk-to-reward ratio
- Overexposing a position
- Letting emotions get in the way
- Not researching enough
How to Avoid Mistakes in Crypto Futures Trading?
Let’s take a look at the above-mentioned mistakes in a little more detail and understand how to avoid these mistakes.
Trading without a plan
This is one of the most common mistakes that a new trader in the Futures market makes when they start off. Basically, it is a culmination of all the other points combined into one – and that is not having a proper trading plan.
A trading plan is essentially a blueprint of everything you are going to do in a market situation, how you’re going to react, how much time and capital you want to invest, and the strategy you will execute in the live market. A trading plan removes all chances of emotions getting in the way of trading, over-leveraging, or overexposing yourself to a trade you can’t manage and deal with.
If you observe carefully, all of the other points that are mentioned as mistakes in the table above. Therefore, having a strong, and fixed trading plan which can be subject to change upon careful reconsideration is the best way to go. A trading plan will keep your expectation in check when your trading is going very well and also keep you focused if you’ve had a string of bad trades in the market.
Thus, all traders must keep a trading journal or a diary that keeps track of every action that they take in the market so that they can go back to check on them and not make the same mistakes again and again.
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Trading without stop-losses
Stop-loss is a concept in the world of trading that simply means a forced exit of a trade that is going against you after booking a loss that you are comfortable with. This is essentially a measure of protection against a complete wipeout of one’s capital and enabling a trader to come back the next day to take a trade again.
Another reason why this is important is when a trader is in the market with an open position and the market is going in a direction that is against the trader’s view, it can be tempting to keep the position open thus giving way to emotional decisions in a high-stakes environment. However, that can be a grave error as it can potentially result in a complete wipeout of one’s capital in one bad trade, eroding the trader’s confidence in the process too.
Over-leveraging is another mistake that traders tend to make in the world of Futures trading. Futures trading employs a concept of leverage, which is nothing but the use of borrowed funds to increase one’s trading position beyond what one can afford with one’s own limited capital. In other words, leverage is the ability to control and use a large contract value with a relatively small amount of capital. So leveraging allows a trader to effectively earn a significantly higher return on investment (ROI) with their own limited capital.
So over-leveraging comes in where a trader fails to understand the actual implication of leveraging where, while it can give you higher profits if the trade goes in a favourable direction on the other hand can take out equally large sums of money from your investment corpus if the trade happens to go against the trader. An uncontrolled bad trade can effectively wipe out a person’s capital investment in the trade and thus one should be putting stop-losses (mentioned in point 2 above) to ensure that one only loses a comfortable amount of capital when the trade goes bad.
Not understanding the risk-to-reward ratio
A risk-to-reward ratio is another concept that every trader needs to take into consideration as this is a measure that helps a person to determine whether a certain amount of risk is worth the amount of potential profit one stands to make from the trade. For instance, if the initial position was ₹200, and the potential profit was ₹400, the risk-to-reward ratio is 1:2.
The risk-to-reward ratio can change according to the level of expertise in the market or the risk tolerance a trade has and there is no right figure for this. It is different for each and every trader and that is the way it is supposed to be. But regardless of the risk appetite or expertise, there should be a fixed risk management strategy in place for every trader, or else Futures markets can be a very dangerous affair.
Overexposing a position
A trader is said to be overexposed in a position in the market if the person has committed too much capital in just one or two trades. This typically happens when a trader begins to think that the market is going to move in a favorable direction and they want to optimize the opportunity to make a bigger profit.
However, this is a very risky proposition and can mess up the risk-to-reward ratio of a trade and potentially again wipe out a trader’s working capital if the market moves against them as the inherent risk in the trade increases. This is often seen as a very unwise trading strategy.
Letting emotions get in the way
Emotional trading is another mistake newer traders must be wary of, especially in the Futures trading market. Emotions include excitement after a good, profitable day and also despair after a bad, losing day. These emotions can cloud the right decision-making and lead traders to make poor choices in the heat of action. It can also lead to a trader not adhering to their trading plans and result in taking bad trades without proper analysis.
This can ultimately result in unnecessarily running into losses in the hope that it will eventually come back to profitable territory. But that is unlikely as the decision behind the trade was unsound. Thus it becomes extremely important to remain completely objective and emotionless to ensure trades taken are proper and have a higher chance of profitability.
Not researching enough
Some traders also indulge in trading based on gut feelings or tips from supposed market experts. While this can sometimes yield positive results, it is imperative for the trader to back these tips up with objective research and understanding before taking the trade to ensure one is convinced about it.
It is extremely essential to understand the market, its volatility, liquidity, and other factors regarding its nature before entering a trade with live capital deployment. All of it essentially boils down to having a proper trading plan which keeps all these things in mind.
Read more: Margin vs Futures Trading
Thus from the above points, we can clearly see how these mistakes can cost a Futures trader dearly. We also observed that all of these mistakes can be avoided if a trader creates a foolproof plan that he or she will stick to during a trade, no matter what, and make sure all the mistakes mentioned above are covered.
Also, indeed, these aren’t the only mistakes and there could be newer, different kinds of mistakes one may commit but at the end of the day, the main points to remember are that you need to make a trading plan based on your own analysis and conviction and stick to it to prevent emotions from clouding your decision-making in the heat of the action.
To help you make better trading decisions and reduce losses on bad trades, CoinDCX Futures provides traders with facilities like stop-loss orders to better manage their risk while in a trade. These stop-loss orders come into the market and limit order forms for higher flexibility and lower price slippage.
Users can also start futures trading in CoinDCX Futures with as low as 5 USDT with up to 15x leverage on all trading pairs to take complete advantage of the leverage facility to maximize profits.
Read more: Guide to CoinDCX crypto futures app
Why do Futures traders fail?
The main reasons why Futures traders make losses are that they don’t have a properly defined trading plan and they don’t fully understand the concept of leverage and the risks associated with overleveraging.
How to prepare an effective Futures trading strategy?
An effective Futures trading strategy should be one which has a properly defined points of entry, profit booking, and stop-loss. It should also have various methods outlined which would cover the various market situations and how a trader should act in those situations and have an overall trading plan and risk management strategy.
Dive into the perpetual vs quarterly futures debate for informed trading decisions!