People in the crypto space can see their assets multiply 50 or 100 times overnight, but they can also lose everything in an instant.
Trading contracts in the crypto space is like a heartbeat; it's thrilling and more exciting than a roller coaster.
Have you ever experienced consecutive losses and frequent liquidations?
Then you feel frustrated and regret your decision?
Are you eager to recover losses, but instead, you fall deeper into the hole?
Do you repeatedly fantasize about the scene of success, only to be slapped in the face by reality?
This is something every trader has experienced; you and I are no exception!
The difference is that some people give up under such torture, and some lose all their capital but persist. However, there are very few who persist without a complete realization; what significance does that have?
I have read countless tutorials, learned from many traders' summaries, and analyzed numerous reasons for failure! I have summarized the following points, which I believe can help you:
1. Mindset and emotional management
Mindset and emotional management do not mean that you cannot be happy when you make a profit or feel down when you incur a loss; it means you should not become an emotionless robot!
Rather, it is about firmly believing in your eventual success, understanding that the current losses are temporary, and creating a positive belief system. Additionally, when losses occur, it is crucial to maintain a rational and calm mindset, avoid blind orders, and be able to analyze and operate rationally; this is vital!
2. Continuously improving trading system
Remember, trading is not gambling, but it does have probabilistic attributes. You must continuously summarize and explore a trading system that suits you through long-term trading, establishing your trading rules across various dimensions such as indicator analysis, position sizing, take-profit and stop-loss levels, and short- and long-term cycles to discipline yourself and define your trading rather than trading blindly; otherwise, you will fall into an endless cycle!
3. Capital management
There is a saying: as long as there are green mountains, one need not worry about firewood. You must never have an all-in mentality; this is very dangerous, as once you have that thought, in most cases, the market will lead you to complete despair! You must strictly control this, summarizing your maximum consecutive loss count to manage your capital, ensuring you have a chance to turn things around. This requires extreme calmness; as long as you still have chips, you have a chance to be reborn!
4. Technical analysis
This is very important. If you have no technical knowledge at all, you must not place orders, as that would be gambling on luck, and you will definitely fail, which is terrifying! Learning technical indicators is a gradual process, but once you overly rely on various indicators for your judgments, it can lead to confusion and frequent mistakes, causing you to doubt the technical indicators. It is crucial to find indicators that suit you among many and simplify your approach. Commonly used indicators include naked candlestick patterns, Bollinger Bands, moving averages, MACD, volume bars, OBV, etc. Understand the essence of simplicity!
In short,
Perpetual contracts, also known as perpetual futures contracts, are a type of derivative trading method. Users can use perpetual contracts to go long (Long), go short (Short), or arbitrage to obtain trading returns that are many times higher than their investment capital.
Through perpetual contracts, you can not only make money from rising prices but also profit from falling prices, and leverage can be used to amplify small capital into significant returns.
When trading perpetual contracts, if you wrongly predict the price trend, you may face liquidation, risking the loss of your entire investment capital.
Whether you are a novice investor or experienced in cryptocurrency trading, this article will give you a deeper understanding of perpetual contracts.
Principles of perpetual contracts
The underlying logic of perpetual contracts is: it allows investors to borrow virtual currencies to buy or sell them at a specific price at a specific future time.
For example, Little Fish has 100 USDT and believes that tomorrow Bitcoin's price will rise from 100 to 200. At this point, Little Fish can borrow 900 USDT from the exchange and then use this 1000 USDT to buy 10 Bitcoins. When the price rises to 200 tomorrow, he sells. After selling, Little Fish will have 2000 USDT, and after repaying the 900 USDT to the exchange, his profit from this trade will be 1000 USDT.
If Little Fish only used his original capital of 100 USDT to trade, the profit would only be 100 USDT. So in this example, Little Fish used 10 times leverage to go long on Bitcoin, earning 10 times the profit.
However, if Little Fish predicts the price direction incorrectly and Bitcoin's price drops to 50 the next day, the 10 BTC he holds will only be worth 500 USDT, resulting in a nominal loss of 500 USDT. Therefore, trading perpetual contracts can amplify both profits and losses when using leverage.
Why is it called 'contract'?
The contract trading of virtual currencies is derived from traditional bulk commodity futures trading. In traditional futures trading, traders need to sign contracts when going long or short on the price of a certain commodity in the future, which is why it is called 'contract' trading.
For example, if McDonald's predicts that potato prices will rise significantly in June next year, to control costs, McDonald's will sign a futures contract for potatoes due in June next year through the exchange. No matter how potato prices change by that time, they will purchase a batch of potatoes at the agreed price.
This way, regardless of how potato prices fluctuate later, McDonald's can purchase potatoes at a stable price to ensure a steady supply of fries. If market prices rise, McDonald's can still buy at the contract price, saving costs. Conversely, if market prices fall, although McDonald's must pay the contract price, the actual total cost for the business will be lower. In fact, international companies like McDonald's do use futures contracts to ensure supply stability and cost control in real life.
However, when these commodity futures contracts are derived into virtual currency trading, exchanges have borrowed the operational methods of futures contracts, but they do not actually lend you money or coins. Instead, they use similar calculation methods to visually convey leverage multiples, expected profits, or losses to you, lowering the threshold for contract trading and making it easier for more investors to participate.
What types of contracts are there?
Perpetual contract: A perpetual contract has no expiration date, allowing users to hold positions indefinitely and close them at their discretion.
Delivery contract: A delivery contract has a specific delivery date, including weekly, bi-weekly, and quarterly delivery contracts. When the specific delivery date arrives, regardless of profit or loss, the system will automatically settle.
USDT margin contract: This means you need to use the stablecoin USDT as collateral; as long as you have USDT in your account, you can trade contracts for multiple currencies, with profits and losses settled in USDT.
Coin-based margin contract: This uses the underlying currency as collateral, and you need to hold the corresponding currency before trading, with profits and losses settled in that currency.
The most stable way to trade contracts in the crypto space
Choose the right coins and be a good person. As a leveraged trader, volatility can be amplified by leverage. The primary consideration in trading should not be volatility but certainty.
In a rising market, go long on strong coins; conversely, in a falling market, short the weakest coins.
For example, at the start of the new quarter, the strongest uptrends are EOS and ETH, and the preferred choice for long positions when there is a pullback is these two currencies. When prices are falling, the preferred choice for shorting is Bitcoin. Even if the final result is that mainstream currencies fall more than Bitcoin, only shorting or chasing Bitcoin can greatly avoid the risk of violent rebounds.
Most participants in the crypto space are short-term traders, and it's challenging to hold out for ideal exit points while also lacking expertise in position control and relying on fluctuations to average down. Given this situation, for most traders, getting a good entry price outweighs everything else.
Once there is a profit, take some off the table to secure gains, and set a stop-loss at the cost price for the remaining portion. This is something I have always emphasized in my community.
The essence of contract trading strategies
(1) Identify the main trend and trade in the direction of that trend; otherwise, do not enter the market.
(2) If you are trading with the trend, entry point:
1. New breakout points in the trend;
2. Breakout points trending in a certain direction during consolidation;
3. Retracement points in an upward trend or rebound points in a downward trend.
(3) Positions that follow the trend will bring you substantial profits, so don't exit early;
(4) If the entry aligns with the larger trend and the paper profit proves you are correct, you can pyramid your position (reference 2)
(5) Maintain position until the trend reverses and close the position.
(6) If the market trend is opposite to the entry position, cut losses quickly.
In addition to adhering to the above strategies, remember three qualities: discipline, discipline, and discipline!
The way of trading is to accumulate little by little; compound interest is king. If you deviate from the cost, you must not turn back into a loss. If you have made a profit, take some off the table to avoid working hard for nothing. In summary: be bold when you earn, but let the remaining part lose at the original price.
Tips for making money with perpetual contracts
1. Avoid going all-in
How should capital be allocated? Capital allocation should be understood from two levels:
Firstly, from the perspective of risk, clearly define how much loss your account can or is prepared to withstand. This is the foundational thought for our capital allocation. Once this total is determined, consider how to allocate that total in case we continuously make mistakes in the market, so that we can willingly accept losses and admit failure.
I personally believe that the most risky method should also be divided into three parts. In other words, you should give yourself at least three chances. For example, if the total account capital is 200,000, and the maximum allowable loss is 20%, or 40,000, then I suggest the most risky loss plan is: the first time 10,000, the second time 10,000, the third time 20,000. I believe this loss plan still has a degree of rationality, because if you get it right once out of three attempts, you can profit or at least continue to survive in the market. Not being kicked out of the market itself is a kind of success, and it gives you a chance to win.
2. Grasp the overall market trend
Trends are much harder to trade than fluctuations because trends involve chasing the rise and killing the fall, requiring patience in holding positions, while high-selling and low-buying aligns more with human nature.
Trading is about not being able to make money the more it aligns with human nature; it is precisely because it is difficult that it is profitable.
In an upward trend, any violent pullback should be an opportunity to go long. Do you remember what I said about probabilities? So, if you're not in the trade or have exited, be patient and wait for a 10~20% drop to be bold and go long.
3. Set take-profit and stop-loss targets
Setting stop-loss and take-profit levels can be said to be the key to determining whether you can profit. In several trades, we need to ensure that total profits exceed total losses. Achieving this is not difficult; just do the following:
① Each stop-loss ≤ 5% of total capital;
② Each profit > 5% of total capital;
③ Total trading win rate > 50%
If the above requirements are met (profit-loss ratio greater than 1 and win rate greater than 50%), you can achieve profitability. Of course, you can also have high profit-loss ratios with low win rates or low profit-loss ratios with high win rates. Anyway, as long as the total profit is positive, it's fine. Total profit = initial capital × (average profit × win rate - average loss × loss rate).
4. Remember not to trade too frequently
Since BTC perpetual contracts are traded 24/7, many beginners operate daily, nearly trading every day during the 22 trading days of a month. As the saying goes: If you walk by the river often, how can you not get your shoes wet? The more you trade, the more likely you are to make mistakes. After a mistake, your mindset can deteriorate, leading to impulsive decisions and 'revenge' trading, which may go against the trend or involve heavy positions. This can lead to a series of mistakes and significant losses on your account, which may take years to recover.
5. Timing of entering the contract
Many users trade 24/7, which is practically equivalent to giving away money. The purpose of contracts is to implement relatively stable profit strategies under controllable risks and stable indicators, not to click buy with 100 times leverage and become rich! Therefore, the timing of entering a contract is particularly important!
⑴: Do not open positions during periods of significant bullish or bearish news, as the market is very chaotic at this time, and spot prices can fluctuate wildly between 1-3%. Choosing to gamble on the market at this time can easily lead to being caught off guard.
⑵: I generally choose to enter after a significant fluctuation during the second bottoming or after an upswing, because the volatility of the market tends to stabilize after the second wave of movement. The risk factor in the subsequent range is the lowest. The goal of contracts is to implement the most suitable strategy within the smallest risk range.
⑶: Enter the market within the indicator range; as long as the indicator parameters do not meet your expectations, do not place an order. This can be understood as entering the market within your strategy range, ignoring the market unless it reaches your psychological price level. Because while contracts amplify leverage, the risk factor also amplifies, so self-discipline is very important.
In summary, when the market stabilizes and indicators align, the risk rate drops by 50%, and only then should you trade.
