Learn how to trade derivatives

Author: nicolas tang

cryptocurrency derivatives trading

Compared to spot market trading, trading derivatives is highly complex. It is done through financial contracts such as futures, forwards, Options and swaps. Also, the trades which in this case are in the form of contracts, normally mature in a future date.

However, due to the high rewards associated with trading derivatives, they are gaining popularity among investors. Traders are racing to invest with the few cryptocurrency derivatives trading exchanges like Phemex in the market.

Steps to becoming a crypto derivatives trader

  1. Choose the right exchange platform

To trade crypto derivatives, you first look for an exchange that provides crypto derivatives trading services. The exchange dictates your success in trading derivatives.

When choosing a crypto derivative exchange, there are a number of things that you should consider. One is that pure crypto exchanges normally offer derivatives that are not regulated. Secondly, there are crypto derivative exchanges that allow retail traders while others are purely meant for institutional investors.

  1. Practice in a demo account

Before risking your funds, it is always important to do some practice in a demo account using virtual money. This way, you get to understand the exchange’s platform and how the financial contracts work.

You should ensure that you try to open all the available types of financial contracts on the platform so that you can experience how they work.

  1. Fund your account

Once you get satisfied with the trading experience, you can proceed and deposit funds into your live trading account.

  1. Analyze the market and start trading derivatives

With funds in your account, you can now start trading derivatives.

How to trade derivatives

When trading derivatives, there three types of orders that you can open. You could choose to open a market order, limit order or conditional order.

For limit and conditional orders, you should choose the leverage and method of execution. In a nutshell, there are three methods of executing orders: GoodTillCancelled, FillorKill and ImmediateOrCancel. For the market orders, the execution method is usually set at immediate or cancel.

Then after finishing with all the order settings, you should proceed to click on the ‘Long’ or ‘short’ button. Long means you have entered a contract to buy while short means you have entered a contract to sell.

Market orders

Normally, these orders or contracts are executed and filled instantly from the order book at the best available market price. There are two types: sell market orders and buy market orders.

For these orders, there is a guaranteed execution. However, the execution price is not guaranteed due to market price fluctuations.

Limit Orders

Contrary to market orders, limit orders have a guaranteed execution price if the price reaches to the set price. Nonetheless, these orders are not executed instantly.

To set up a limit order, you have to set the execution price. For buy limit orders, the execution price is usually set at a price lower than the last traded price. On the other hand, sell limit orders are set at a price higher than the last traded price.

Then, you have to clarify the method of execution. If you choose to use GoodTillCancelled (GTC), your order remains active until it is fully executed or until it is canceled. However, if you choose to use ImmediateOrCancel (IOC), your order is filled at the limit price or canceled. Then if you choose to use FillOrKill (FOK), the order is filled at the limit price or canceled. The difference between FillOrKill and ImmediateOrCancel is that for the ImmediateOrCancel the order can be filled partially and the unfilled part canceled, while for the FillOrKill the order cannot be filled partially.

Example: A trader wants to sell 20000 BTC USD perpetual contracts immediately with a maximum execution price of no more than 9000 USD.

  • If he decides to use GTC, 9000 contracts would be filled immediately, with the other 11000 being added to the order book, waiting to be executed when they become available.
  • If he decides to use FOK, the order would be canceled since there no enough contracts for the order. This means that no order would be filled.
  • If he decided to use IOC, 9000 contracts would be filled, at 9000 USD and the remaining 11000 being canceled.

Conditional orders

Just as the name suggests, the order is triggered or filled when a set price is reached. It is most normally used by experienced traders. Apart from setting a trigger price, the rest of the order settings are pretty much similar to the limit orders.

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