In the ever-dynamic landscape of Decentralized Finance (deFi), everyone is always on the look for whatever it is that is capable of bringing yields. One such yield-bringing DeFI derivative is futures trading.

It involves an agreement based on smart contracts where there would be a buy or sell of an asset at a certain predetermined price against the future. It has become one of the tools that helps with portfolio diversification. Although it comes with great risks, there are laid down strategies that can be of help, especially to beginners who want to try it out.

In this article, you will be equipped with knowledge and insights that can help you navigate the world of futures trading as it pertains to Decentralised Finance. Get ready to enjoy the amazing opportunities that abound in the world of futures trading.

Demystifying Futures Contracts: The Foundation of Futures Trading

Futures contracts serve as the foundation behind futures trading, They represent an agreement between you- the trader and the platform you are trading with. Based on your buy or sell order, the laid down contract serves as a means to provide a hedge against price fluctuations or market movements as obtained when trading in the regular market.

Futures provide an opportunity for you to speculate the price movements of cryptocurrencies, or any other digital asset you are interested in. Once your prediction is correct, you can make huge profits depending on the amount you set for the trade, as well as the leverage you used for your trade.

Understanding the Mechanics of Futures Trading

In trading Futures, there are specific actions you need to take that would help you in executing the futures smart contract. Here's a simple breakdown of the process:

Contract Selection

A major thing you have to do would be to set a trade that aligns with your teaching objectives of plans. Factors to consider before authenticating the smart contract would be to observe the risk with the assets you are trading, examine the testing fees of the exchange you want to make use of, the expiration date of your trade, etc.

Opening a Position

For you to open a position, you need to place a buy or sell order on the futures contract. For the buy, you'd be anticipating a price increase which is where you'd need to long the asset you're interested in. For the sell, you'd be anticipating a price decrease, which is where you'd need to short the asset you're interested in.

Margin Requirements

Futures trading requires you to deposit a margin, i.e. a percentage of the contract value, to act as collateral for your trade. Margins ensure that you fulfill every obligation you were meant to based on the contract you selected and agreed to.

Leverage Requirements

Leverage is the ability to control a large contract value with relatively smaller capital. With leverage, you can take positions that are worth multiple of your initial investment. For example, if a futures contract has $10,000 as its notional value, and the initial margin requirement is 5%, with $500, you'll be able to control the contract. This simply means that at every 1% that the contract price increases, you'd be getting a 20% profit or loss based on your $500 investment. For context, the ratio of $500 to $10,000 is 1:20.

Price Fluctuations and Profit/Loss

As with the regular trading market, the Futures market isn't free from fluctuations. As the price of the underlying asset you're interested in fluctuates, the value of the futures contract changes accordingly. If the price movement aligns with your trade position, you realize a profit; if it moves against your position, you incur a loss.

Contract Settlement

At the expiration date, the futures contract comes to an end either by delivering the underlying asset (for long positions) or receiving the cash equivalent (for short positions).

Strategies for Navigating the Futures Market

In trading Futures, there are risks and uncertainties as well. If the price movement doesn't go along with what you've set your trade upon, you are likely to incur losses.

However, one thing that makes Futures trading fun is that it gives each individual a means to act according to risk appetites as well as trading goals. Of course, more risk, more reward, and vice versa. If you happen to have an appetite for high-risk, you're covered with Futures. If you also happen to have an appetite for low-risk, you're still covered.

Nevertheless, here are key strategies that would help you be on top of your game regardless of your risk appetite.

Hedging

Hedging is one approach that most Futures traders take to protect themselves from potential losses. It involves taking an opposite direction from your conviction.

Here's an example to explain the concept; Akin has CoinX for long-term hold especially as he believes that there's much profit to be made when the coin hits a certain level.

However, his current analysis tells him that the price of CoinX has a high chance of falling this month. Now remember Akin plans to hold this coin for the long term. He still believes in the project, but there's a great chance that his portfolio will be affected based on the fall. What should Akin do? Sell his long-term holdings and buy at a cheaper price when the coin's price falls? Continue holding and ignore the analysis he made? Trade with the hedging abilities that Futures bring?

As a wise trader that Akin is, he went with the hedging option. Why lose when you can win? With Futures, Akin can place a short order on his asset and when it hits his target, make a profit from it even whilst his holdings for the long term remain.

Yes, he might be affected by the fall in price for his long-term hold. But he was still able to profit from the fall via Futures trading. Unlike spot trading where trade positions are based on the current market price, Futures trading is based on a predetermined price on a future date. Short positions can be carried forward just like how Mr. Akin did with shorting CoinX on Futures trading as a hedge for his long-term investment.

Speculation

You must take a speculative approach before trading a position on any futures contract.

You have to fully analyze market trends, look at technical indicators as well as fundamental analysis, etc. All of these will help you make informed decisions on how much risk you should be willing to take on a trade.

Arbitrage

Arbitrage is a strategy that involves exploiting price differences across diverse exchanges or markets.

This gives you an avenue to trade simultaneously with the same futures contract but in different platforms to profit from the price differences these platforms come with.

Embarking on Your Futures Trading Journey: Essential Considerations

Before you embark on any trade, you have to look into the following factors:

Risk Management

Futures trading involves inherent risks. Thus, you must establish a sound risk management plan to mitigate potential losses. This includes utilizing stop-loss orders, diversifying your positions, and adhering to a strict risk-to-reward ratio.

Understanding Trading Fees

Futures trading brings about fees associated with order execution, margin maintenance, and contract settlement. Before you take on any trade, you can take out time to compare fees across different brokers and exchanges to optimize your trading costs.

Emotional Discipline

Futures trading can be emotionally tasking. You must maintain discipline and avoid impulsive decisions driven by fear or greed.

Final Words

Futures trading can be profitable for you as a trader. As long as you're cautious, and disciplined when making your decisions, it can be a great tool for you to elevate your financial position and stay protected from losses.

Once you understand the fundamentals, and you have the right risk management in place, it is time to explore the potential of Futures trading and unlock a new horizon in your DeFi journey.