You can analyze market bullish and bearish sentiments based on this data. Secondly, the cryptocurrency market is not like stocks; you don't need to understand the operations of many listed companies or their industry development cycles. In contract trading, you just need to respect the trend; you don't need to consider the fundamentals of the coin if you are not holding spot long-term.
If you want to do well in contract investing, here are several basic concepts you need to know.
1. What is the essence of contracts?
The biggest difference between contracts and spot is the leverage. For example, on January 3, 2024, when the sudden news broke that Bitcoin ETF would not be approved, BTC plummeted by 10% in an instant, and many altcoins dropped by 20%. If you bought Bitcoin with 10x leverage, you would be liquidated. Later, BTC rose back to 45,000 on January 8, and this had nothing to do with you anymore. However, if you held spot, it was clear that your losses on that day were much less than your A-shares. Therefore, in contracts, you are earning from short-term volatility. If you hold contracts long-term, you might have to pay a high funding rate, and the reason you participate in contracts is to make short trades and run away with big profits.
2. Basic concepts you need to understand before trading contracts
Isolated margin, cross margin, funding rates, long-short ratios, leverage position limits, what multiple of leverage to use for trading, how to calculate contract holding fees, etc. If you don’t understand, you can search for this on Baidu; the content is quite basic, so I won't elaborate here.
3. Pull back to my own trading system.
I mainly engage in intraday trend trading, primarily trading based on the 15-minute chart, which is somewhat of a T0 habit from stocks. It is actually not very difficult. In this trend, I find a suitable leverage for myself and make high-probability trades frequently. Over time, the power of compounding will come. Sometimes I may have several hundred trades in a day. Therefore, I definitely need to find a platform that offers rebates, and you can use my referral code, which has a high rebate rate. I remember in December, a wave of ORDI and SOL market movements helped my account grow from 400k to over 700k, with ORDI's volatility earning me a total of 7,000. At that time, the total number of trades per day was several hundred, with the highest single-day profit being $18,000.
My approach is 'small positions, many orders, choosing high trading volumes, and investing in markets with high bullish sentiment.' After all, if the volatility is insufficient and each trade does not yield enough profit, it leads to excessive trading, which incurs too many fees. Then, on the evening of January 3, a wave of volatility came, with news that Bitcoin spot would not go through, causing all altcoins to drop directly by 20%. I suffered my first single-day loss of over 10,000, nearing -$12,000. At that time, I summarized the problems I faced, which was not strictly setting my stop-loss. In the following days, I had my first single trade profit over 10,000 (Ethereum), and later, I also captured the second wave of Pepe's surge.
4. Contract trading must set a stop-loss immediately after placing an order.
The coin can spike up or down with just one or two pieces of news, and there are too many cases of multi-porous double explosions. Moreover, trading happens 24 hours a day; while you are sleeping, you could be liquidated at any moment, so you must develop the habit of setting stop-losses. I generally engage in trend trading, and if a trend goes wrong, never hold onto the position because sometimes, once the emotional consensus is established, there are many cases where the price fluctuates 100% in one direction. No matter how much money you have, you cannot withstand it. Just look at the TRB which dropped to 12; it rose from 120 to over 700 in ten trading days with no pullbacks in between. If you were shorting, even with 0.5x leverage, you would have been liquidated long ago. So don't wait until one day you are liquidated to understand the importance of stop-losses.
5. Definitely do not gamble.
Never harbor any lucky thoughts, because you are trading contracts. Even if you are right nine out of ten times, no matter how much you earn, as long as you make a mistake and stubbornly hold onto a position, you will be 100% liquidated. Being liquidated has a huge impact on your confidence and mindset, so I suggest that if a contract loses more than 30%, you should close the position and take a break to reflect on whether you made a mistake. A 20% fluctuation in a couple of days is very normal and happens daily, so if you want to beat the market long-term, you need to avoid these factors that can lead to your failure.
6. If you are new to the cryptocurrency market and your assets exceed 20% in digital currencies, please immediately withdraw this proportion to 10%.
Otherwise, this volatility will keep you awake at night and affect your operations.
To reduce the risk of liquidation and clearing, the following strategies can be adopted.
1. Reasonably control the leverage factor
All leveraged traders should keep in mind: the higher the leverage, the greater the risk of liquidation. For novice traders, it is strongly recommended to use no more than 3x leverage to avoid excessive risk amplification.
For example: If the account funds are 1,000 USDT, using 3x leverage allows you to control a position of 3,000 USDT, which carries less risk compared to 10x leverage of 10,000 USDT. Earning less is okay as long as you protect your principal.
2. Set stop-loss levels in advance
Stop-loss is an important risk control tool to avoid liquidation. Traders can set a stop-loss price when opening a position.
For example: If you go long on BTC with 100,000 USDT, you can set the stop-loss at 98,000 USDT (a loss of 2%). If the market price drops to this point, the system will automatically close the position to limit the loss.
3. Maintain sufficient margin
When market volatility intensifies, maintaining a high margin ratio can effectively reduce the risk of liquidation.
For example: If the exchange's maintenance margin rate is 0.5%, it is advisable to prepare at least 3 to 5 times the additional funds as a buffer. When the price approaches the liquidation point (upon receiving liquidation notification), timely add margin to ensure that the account funds are sufficient to reduce position risk.
4. Observe the market liquidation heat map
Through the liquidation heat map, you can observe which price ranges have a large number of liquidation positions and predict the areas of price volatility. Investors can adjust their entry and exit plans based on this data to avoid entering high-risk areas.
For example: If the heat map shows a large number of liquidation orders between 100,000~98,000 USDT, it indicates that this range may become market support or resistance.
5. Diversify investments to reduce single position risk
Do not put all your funds into a single position; instead, diversify into different trading pairs or lower the leverage of a single trade. This way, even if one trade gets liquidated, you still have some funds unaffected.
For example: If you have 5,000 USDT, you can allocate 2,500 USDT to BTC and 2,500 USDT to ETH to reduce the impact of single market volatility. It is important to note that the cryptocurrency market often sees the entire market drop simultaneously, so this strategy may not always be effective. However, a reasonable allocation of altcoins and mainstream coins can help reduce risk.
It can be observed that this major drop even caused ETH, SOL, and other top five mainstream coins to drop more than 30% from their peaks, which indicates that leverage greater than 3x is likely to be liquidated. This is also why we mentioned in previous articles during the bull market the 'reason for many liquidations in a bull market.'
6. Pay attention to market trends and major events
Market news, macroeconomic data, policy changes, etc., will all affect the price of Bitcoin. For instance, during FOMC meetings or the release of CPI data, the market often experiences significant volatility, and approvals or rejections of ETFs, as well as regulatory policy changes, can also affect market confidence.
Investors should closely monitor these key events and adjust their positions in a timely manner to reduce the liquidation risk caused by sudden market fluctuations!
Although leveraged trading can amplify profits, it also magnifies risks. While I encourage everyone to avoid a gambling mentality and focus on research and holding spot assets, if you still want to trade with leverage, it is very important to understand the mechanics of positions and liquidations.
By reasonably controlling leverage, setting stop-losses, preparing sufficient margins, observing market heat maps, and diversifying investment targets, you can effectively reduce the possibility of liquidation.
If you are a beginner cryptocurrency trader or encountering contracts for the first time, although the leverage limits of exchanges may look tempting, it is still recommended to start with low leverage trading and learn to observe market trends and manage risks to avoid massive losses due to leverage, which could lead to immediate graduation from the market!
