Managing Risk in Crypto Futures Trading: Strategies You Need to Know!

Key takeaways:

• Getting an introduction to crypto Futures and different concepts such as leverage and risk management.
• Understanding 6 main ways to manage risk in crypto Futures trading.
• What is money management, what is a trading plan, how to keep emotions in check while trading, and why you should utilize. stop-loss orders are extremely important in crypto Futures trading.

Introduction to Risk Management in Crypto Futures

Crypto Futures or Futures contracts, in general, employ the concept of leverage. By definition, leverage is nothing but the ability to control a large contract value with a relatively small amount of capital. This is something that helps you to maximize your profit potential in your endeavors of speculating on the price of an asset. 

What that means is that you can buy ₹1000 worth of any particular crypto asset by putting up only ₹100 of your own capital, thus taking up a 10x leverage. You pay the ₹100 upfront while the ₹900 is fronted by the exchange for you to trade and potentially profit off of.

While Futures contract as a concept was built as a means for traders of commodities of bullion in the traditional world of finance to have some kind of price hedge. For example, a gold jeweler, who buys raw gold, converts it into a beautiful piece of jewelry and then sells it to a customer by charging some kind of “making fee” on top of the market price of gold. Now while that is okay in a day when the price of gold has gone up after the jeweler bought the gold from the market, but in case the market value of gold goes down by say 10%, the jeweler would have to incur a loss of 10% while selling that piece of ornament. Thus to offset that, Futures contracts were created so that traders like these could cover the downside by paying a smaller sum as an upfront fee.

But in recent days, Futures trading has become more and more popular as this concept of leverage has resulted in people making more than double to even triple-digit returns on their investments through Futures! Say you buy ₹1000 worth of BTC through a Futures contract worth ₹100 and then the price of BTC moves 30% up over the period of a month. Now if you decide to book a profit on this trade, you can stand to earn 30% of ₹1000, or ₹300 with an initial investment of only ₹100, resulting in a 200% or a 3x return within a month!

Futures also provides traders the opportunity to go short on an asset they believe is going to lose value over time. One can get into a trade at a certain price by selling the Futures contract beforehand and then buying it back when the price falls down.

But this concept of leverage brings with it a certain amount of risk too, that results in common crypto Futures trading mistakes. One of the biggest mistakes of this is getting into trading without understanding the concept of leveraging fully, and thus falling victim to something called over-leveraging.

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What are the ways to manage risk in Crypto Futures Trading?

1. Understanding money management

Money management in the context of trading overall basically means implementing techniques and strategies to limit your downside risk in a trade while simultaneously increasing the reward. To achieve this goal, seasoned traders usually work and tweak trading position size by increasing or decreasing it based on different rules and comfort levels. 

Some traders like to take greater risks to get bigger rewards in a lesser number of trades. But these kinds of traders lie in wait for the best and perfect situation to act and then they pounce on the opportunity. These traders take fewer trades but act on very high quality and high conviction trades, which give higher returns too.

The other kind of trader is those who depend upon the volume of trades. They implement a simple strategy that isn’t too difficult to interpret and execute and they undertake a large number of trades in the market with the intention of having higher positives and lower negatives and thus be profitable in the longer run.

There is no right or wrong here, but simply understanding what kind of trader you are and how you can act upon it. 

2. Utilizing take-profit and stop-loss orders

Booking profits and cutting losses short are two of the most important skills a professional trader needs to have. If these two are solved, one can rest assured that they will be able to make a lot of money out of speculative trading in the market. Strategies may come and go, they can change, and they can improve but taking profits at the right time and also making sure you don’t lose more than what is necessary and bearable by you are the two most important factors to manage risk in crypto Futures trading. 

CoinDCX Futures provides features such as limit orders, market orders, stop-loss limit orders, and stop-loss market orders to equip traders with the best possible tools to execute in the market with the right kind of mindset. 

3. Keeping emotions in check while trading crypto Futures

This is another crucial factor that can make even good traders take bad trades in the crypto Futures market. The potential of a game-changing trade with the benefit of up to 25x leverage provided for 150+ crypto trading pairs on CoinDCX Futures – a trader can let emotions take over and end up taking a bad trade that can potentially result in that person wiping out his or her trading capital.

And in a market such as the crypto market, volatility is much higher than in other traditional financial markets and thus, markets can turn at less than a moment’s notice and it is easy to let emotions cloud your better judgment. But that can lead to poor decisions while in the market and this next point is going to help you solve this problem. 

4. Building a trading plan

Building a crypto Futures trading plan is quite possibly the single most effective way of solving most of the issues that traders face while trading in the crypto Futures market. As mentioned in one of our other articles in the CoinDCX Crypto Futures trading blog series, a trading plan is 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 also takes care of your tendencies to let emotions get in the way of trading, over-leveraging, or overexposing yourself to a trade you can’t manage and deal with.

Thus, this is probably the single most important learning you should take away from this blog – that is to build a foolproof trading plan which isn’t rigid but is stern. What I mean by that is while a trading plan is definitely open to improvements as you grow as a crypto Futures trader, at the same time, there should be some factor of discipline in it that you will follow your plan during a trade, no matter what. 

5. Avoid overtrading

Overtrading is another feature of traders across various markets, including the crypto Futures market too. Overtrading can be a result of a string of bad trades that a trader might have suffered over a certain period of time and now wishes to get back the capital he or she has lost. While that objective isn’t wrong, the method definitely is. Overtrading in a way can lead to increased chances of taking more wrong trades in the market, thus resulting in more losses for the trader. 

This is why a cool-off period becomes absolutely necessary for a trader to get off their trading terminals and take a break. This is another way one can attempt to manage their risk in crypto Futures trading, where the stakes are much higher than the typical kind of trading or investing for the long term. Over the long term, volatility is smoothened out to give attractive returns, but shorter timeframe trading can 

6. Understanding the risk-to-reward 

The risk-to-reward ratio is something that every trader should keep in mind while taking every trade in the crypto futures market. This ratio 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 in the market. For example, 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 is something that varies from trader to trader depending on the level of expertise one has or the amount of loss tolerance one has or a combination of both these things. But regardless of the risk appetite or expertise, there should be a fixed risk management strategy in place for any crypto Futures trader, or else Futures markets can be a very dangerous affair.

Feeling confident in your risk management skills? Time to check out BTCUSDT perpetual futures on CoinDCX!

Conclusion

Every trader, especially in the crypto futures market should try to manage their risk and be involved in responsible trading. The crypto Futures market can be an attractive place to make a lot of money, especially if you take advantage of the leverage feature provided here but one should be responsible with their money and shouldn’t be involved in anything that might be along the lines of gambling in nature. 

CoinDCX Futures provides users with access to 15x leverage to be able to make the maximum profit out of the market but at the same time, we provide our users with access to cutting-edge features and tools like limit orders, market orders, stop-loss limit orders, and stop-loss market orders so that our users can indulge in responsible and risk-managed crypto Futures trading.

Read more: Guide to CoinDCX Futures Trading app

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