You can analyze the market's long and short sentiments based on this data. Furthermore, the crypto circle is not like stocks; you don’t need to understand the operations of many listed companies or their industry development cycles. In the crypto circle, when trading contracts, you only need to respect the trend; you don’t need to consider the fundamentals of the coin if you are holding spot long-term.
To do well in contract trading, there are several basic concepts you need to know.
1. What is the essence of contracts?
The biggest difference between contracts and spot trading is leverage. For example, on January 3, 2024, a sudden news broke that the Bitcoin ETF would not pass, and BTC would drop straight down by 10% in an instant, while many altcoins would drop by 20%. If you bought Bitcoin with 10X leverage, you would get liquidated. Subsequently, BTC rose to 45,000 on January 8, and that no longer had anything to do with you. If you held spot, it’s clear that your drop would even be much less than your A-shares that day. Therefore, in contracts, you earn from short-term volatility. Holding contracts long-term may require you to pay a high funding rate. And the fundamental reason you participate in contracts is that you want to trade short-term, make a big profit, and run.
2. Basic concepts you need to understand before trading contracts.
Isolated positions, cross positions, funding rates, long-short ratios, leverage position limits, what multiples of leverage to use for trading, contract positions, how to calculate transaction fees, etc. If you don’t understand, you can look it up; the content is relatively basic, so I won’t elaborate here.
3. Bring it back to my own trading system.
I primarily focus on intraday trends, mainly trading based on 15-minute charts. This is a habit that those who are used to T0 in stocks generally do; it’s not too difficult. Find the appropriate leverage for yourself in this trend, and engage in high-probability trades repeatedly and frequently. Over time, the power of compound interest will come. Sometimes I may execute several hundred trades in a day. Therefore, transaction fees must be sought from those with rebates; you can find my referral code here, and the rebate rate is very high. Remember the wave of ORDI and SOL in December, which helped my account grow from 400,000 to 700,000. ORDI had a huge fluctuation, earning 7,000 in total, with the total number of trades being several hundred each day, and the highest daily profit being $18,000.
My approach is to have 'small positions, large number of trades, and choose those with high trading volume and strong market bullish sentiment.' After all, if the volatility is not enough and the profit per trade is not enough, trading too frequently will incur too much transaction fee. Then, on the night of January 3, a wave of significant volatility occurred, and the news broke that Bitcoin spot would not pass; all altcoins dropped directly by 20%, and ORDI dropped by over 20%. I suffered my first daily loss of over 10,000, close to -$12,000. At that time, I also summarized the problems I faced, which was not strictly setting my stop losses. In the following days, I made my first single trade profit of over 10,000 (Ethereum), and later, I was able to catch the second wave of big gains with Pepe.
4. In contract trading, be sure to set a stop loss immediately after placing an order.
Coins can fluctuate wildly due to one or two pieces of news, and there are many cases of double liquidations. Plus, trading occurs 24 hours a day; while you sleep, you can be liquidated at any time, so it’s essential to cultivate the habit of setting stop losses. Also, I generally focus on trend trading; if a single trend goes wrong, do not hold on. Because sometimes, once emotional consensus is established, there are many cases where the price moves 100% in one direction; no matter how much money you have, you cannot withstand it. Just look at TRB in December, which surged from 120 to over 700 in ten trading days without any pullbacks. If you shorted, even with 0.5 times leverage, you would have been liquidated long ago. So don’t wait until one day you get liquidated to realize the importance of stop losses.
Five: Absolutely do not gamble.
Never harbor any delusions, because you are doing contracts. Even if you are right nine times out of ten, and make a lot of money, as long as you are wrong once and go against the market, you will 100% get liquidated. A liquidation has a huge impact on your confidence and mindset, so I suggest that once a contract loss reaches over 30%, you should close the position and take a break to think about whether you made a mistake. In the crypto circle, a 20% fluctuation in two days is very normal; you will encounter it every day, so if you want to beat the market in the long run, you must avoid these factors that could lead to your failure.
6. If you just entered the crypto circle and your total assets exceed 20% in digital currency, please withdraw this ratio to below 10% immediately.
Otherwise, this volatility will keep you awake at night and affect your operations.
To reduce the risk of liquidation and margin calls, the following strategies can be adopted.
1. Reasonably control the leverage ratio.
All leveraged traders should keep in mind: the higher the leverage ratio, the greater the risk of liquidation. For novice traders, it is strongly recommended to use no more than 3 times leverage to avoid excessive risk amplification.
For example: If the account balance is 1,000 USDT and using 3 times leverage, you can control a position of 3,000 USDT. Compared to 10 times leverage of 10,000 USDT, the risk is smaller; earning less is not an issue, as long as you protect your capital.
2. Set stop loss levels in advance.
Setting stop losses is an important risk control tool to avoid liquidation. Traders can set a stop loss price when opening a position.
For example: If you are going long on BTC with 100,000 USDT, you can set a 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 losses.
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 recommended to prepare at least 3 to 5 times extra funds as a buffer. When the price approaches the liquidation point (when you receive a liquidation notice), timely add margin to keep your account funded and reduce position risk.
4. Observe the market liquidation heatmap.
By observing the liquidation heatmap, you can see which price ranges have a large number of liquidated positions and predict potential areas of severe price fluctuations. Investors can adjust their entry and exit plans based on this data to avoid entering high-risk zones.
For example: If the heatmap shows a large number of liquidation orders between 100,000 and 98,000 USDT, this indicates that this range may become market support or resistance.
5. Diversify investments to reduce the risk of a single position.
Do not put all your funds into a single position; instead, diversify into different trading pairs or reduce the leverage of a single trade. This way, even if one trade goes bankrupt, part of the funds will remain 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’s important to note that cryptocurrencies often see the entire market drop at the same time; this strategy may not always be effective, but a reasonable allocation of altcoins and mainstream coins can help reduce risk.
It can be seen that this significant drop has caused even the top five mainstream coins like ETH and SOL to drop over 30% from their highs, which also indicates that leverage exceeding 3 times could lead to liquidation. This is also why we previously mentioned in articles about bull markets that 'there are many liquidations during bull markets.'
6. Pay attention to market trends and major events.
Market news, macroeconomic data, and policy changes will all affect Bitcoin prices. For example, during FOMC meetings or when CPI data is released, the market often sees significant volatility, or the approval or rejection of ETFs and changes in regulatory policies can also affect market confidence.
Investors should closely monitor these key events and adjust their positions timely to reduce the risk of liquidation caused by drastic market fluctuations!
Leverage trading can amplify profits, but it also amplifies risks. Although it is encouraged to avoid a gambling mentality and primarily research projects while holding spot, if you still want to trade with leverage, understanding the mechanisms of positions and liquidations is crucial.
By reasonably controlling leverage, setting stop losses, preparing sufficient margin, observing market heatmaps, and diversifying investment targets, it can effectively reduce the possibility of liquidation and margin calls.
If you are a novice cryptocurrency trader or are encountering contracts for the first time, although the leverage limits on exchanges may seem tempting, it is still advisable to start with low-leverage trading and learn to observe market trends and manage risk to avoid huge losses from using leverage – one trade can lead you to graduate from the market!
Taboos in the crypto circle:
One: Do not borrow money to trade cryptocurrencies, do not borrow money to trade cryptocurrencies, do not borrow money to trade cryptocurrencies.
If you borrow money to trade cryptocurrencies, it shows you have a gambler's mentality, and in the end, you will have nothing.
Two: Do not go all in on leverage, do not go all in on leverage, do not go all in on leverage.
Leverage +, all-in, gambler's mentality, and in the end, you will have nothing.
Three: Do not trade on small platforms; small platforms are mostly internal markets.
The internal market is just pulling a K-line; your money hasn’t entered the market but has gone into the account of that shell company.
The rules of the game dictate that most leveraged outcomes will end up at zero; the capital behind loves to see a bunch of retail investors go all in on leverage, because the next moment the money will fall into their pockets!
What if? What if going all-in wins?
This market is one where you compete with market makers in wit and courage; principles combined with patience will help you see the meat you eat, which is also the meat of other retail investors. It is inherently not a fair game.
What if going all-in wins? Even scarier, you will think you are a god; if there is one time, there will be countless times. If you make money, you will eventually put it back in.
As for those wealth myths, just listen to them; as a certain expert said, this world itself is a makeshift stage, where do so many myths come from!
When it’s sideways and suddenly drops, it must be a small drop; after a drop, it must rise. When it’s sideways and suddenly rises, it must be a small rise; after a rise, it must drop.
Sideways trading is a state of bottom accumulation. There is a question that hasn’t been mentioned yet: why do market makers prefer to accumulate during sideways trading?
When the market maker starts to accumulate at the bottom, due to continuous buying, the market purchasing power rises, and the supply decreases accordingly, leading to a necessary price increase.
So when the market maker enters the market, the price will no longer set new lows; this statement is very important.
So why choose sideways trading mode to accumulate chips?
When prices are sideways, the fluctuations are small, and retail investors will automatically exit after a long period of no gains, making it easier for them to quietly pick up cheap chips at the bottom.
Even if I tell you these chips are very cheap, and you have no gains after holding them for a year, can you bear it? Very few retail investors can endure that.
There are some short-term traders or speculative funds in the market; to prevent giving these short-term traders opportunities to speculate, sideways trading is the most effective defensive strategy.
Sideways trading without significant volatility makes it hard to attract retail investors’ attention; often by the time you notice, the price has already reached the ceiling.
These are the advantages of sideways trading. After a period of sideways, the market maker has acquired a certain amount of chips, and the sideways pattern will start to change into a volatility mode, which is up and down fluctuating. The goal is to shake off those uncertain chips. Once those uncertain chips are collected, the market maker's chip collection goal is achieved, and the next thing is to rise.
So after sideways trading comes volatility; if it shakes down, it cannot be a big drop. If it breaks below the market maker's cost price, it’s a major incident. Thus, when it’s sideways and suddenly drops, it must be a small drop, with the purpose of shaking off weak hands.
Vice versa.
If it has been sideways for a period, and suddenly rises, it indicates the initiation of a volatility signal. If it rises directly without volatility, it doesn’t make sense (unless it’s speculative funds that make a quick hit and leave). The chips are in the hands of each holder; the amount flowing naturally daily is simply not enough, so only through volatility can the market be stirred, accelerating the circulation of chips to achieve rapid accumulation.
Even if it’s an upward movement, it should go up while shaking; on one hand, it’s to shake off the following traders, and on the other hand, it’s to sell high and buy low.
Of course, some market makers may also adopt the strategy of first consolidating and then going sideways, but the goal is the same.
Sideways trading is for quietly accumulating chips, while volatility is for further collecting uncertain chips.
In fact, sideways trading and volatility are mutually inclusive; within a box, there can also be regular fluctuations that belong to sideways trading. There is no absolute sideways trading – a line cannot be flat forever, so the concept of sideways trading is broad.
This is another piece of advice targeted at newcomers in the crypto circle (it needs to be etched in your mind).
One: Do not trade with debt; trading with debt means overextending yourself, which is the most important thing.
Two: Make friends with some veterans in the crypto circle.
Three: You can spend a little money to join some paid groups; whom you choose is up to you, as long as you think this blogger is reliable and can truly teach you something, learn from their trading ideas.
Four: Do not buy hot coins.
When a coin is at its peak popularity, or when the market is frantically trading a certain coin, it usually means it’s nearing the end. At this point, if you have held this coin previously, you might consider cashing out. If you haven’t held this coin, it’s better not to enter the market anymore, as there’s a 90% chance it’s just catching the top.
Five: Do not trade on small exchanges; small exchanges are always at risk of going offline, or pulling the plug, making all your funds unrecoverable.
Six: Understand what meme coins and mainstream coins are.
Meme coins are traded on-chain, and due to their low market capitalization, they fluctuate greatly, making it easy to multiply hundreds of times, but the risk is equally high; the risk of direct loss is also significant.
Altcoins are similar to Bitcoin and Ethereum, with different backgrounds and trends!
Mainstream coins refer to coins like Bitcoin, Ethereum, Solana, and other public chain coins.
Seven: Understand what primary and secondary markets are.
The coins you can buy on all exchanges are secondary market coins.
The primary market refers to on-chain trading, purchased on decentralized exchanges or WEB3 wallets; I don't recommend novices to play in the primary market, as it's very easy to get scammed by playing with Pi Xiu coins.
Eight: Understand what left-side trading and right-side trading are.
Left-side trading: buying below the current price and selling above when the market hasn’t clarified, mainly operating with limit orders. For instance, trying to catch a bottom during a downturn, thinking this position will stop falling. This approach carries relatively high risk.
Right-side trading: waiting for the market to show direction, such as when the price starts to rebound or breaks through/breaks below key levels, then entering the market. This is also known as chasing up/down; it’s safer but may not capture the initial part of the move.
Nine: You should follow bloggers who share experiences, rather than those who brainwash or promote guaranteed returns.
Ten: Do not believe anyone who approaches you claiming they can help you make money!
Eleven: Continuously learn. People cannot earn money beyond their own understanding; even if they make a lot at first, if their understanding doesn’t reach that level, they will quickly lose it all and potentially incur heavy losses. You must keep learning to improve your awareness!
I hope every newcomer who just joined the crypto circle can take fewer detours, although you will encounter various setbacks and losses; these are things you need to face to grow quickly!
Still, the saying goes, if you don’t know how to trade during a bull market, click on the avatar of Kweige, follow him; he shares unconditionally about bull market spot planning and contract strategies.
