Hi everyone, today we're going to tell you in simple words what futures are, how futures trading differs from spot trading, and how to use this knowledge to make money trading at StormTrade.dev. Let's go! 🚀
You are probably already familiar with the concept of spot trading, in which a user like you and me can buy or sell some asset at a certain price. Spot markets are popular among many traders around the world, but what if we say that the popularity of futures trading is estimated to be 10 times higher?
What makes futures so popular?
When buying an asset on a spot exchange, the user mentally bets that the price of the asset will go up and his investment will increase. If the price of the asset goes up, the trader is happy and takes profit.
But it happens that the opposite happens, the price of the asset begins to fall, and the trader still wants to make a profit. The trader thinks, what if it was possible to make money on the falling price of the asset?
This is where futures come to our rescue
Futures is a contract that allows you to open a transaction to buy or sell an asset at a certain time in the future.
If a trader believes that the price of an asset will go up, he can open a long position, which allows him, as in the case of spot trading, to capitalize on the price growth.
If the trader believes that the price of the asset will fall, the most interesting thing comes, he can open a short position, which will help him to make money on the fall of the price.
If a trader is filled with knowledge and is one hundred percent sure that the price will go in the chosen direction, he can multiply his position using leverage.
What is leverage?
If you have little capital and are itching to open a large position, or if an asset shows a small price movement and a correctly opened trade gives you a small percentage of profit, Storm Trade provides you with leverage. Thanks to this important feature, a trader is able to open a position of 2, 10 or even 100 times the available capital.
It doesn't make any sense. Give me an example!
Okay, consider the plucky futures trader Alex and his friend Tim, who trades only spot trading. The friends have the same capital, equivalent to $2,000, which they want to increase through trading on exchanges.
Both Alex and Tim are confident that the price of BTC will go up. Alex opens a long position on Storm Trade for $2,000 or 0.1 BTC with x10 leverage, which means his position size will be 1 BTC.
Tim opens a binance spot exchange and buys 0.1 BTC.
Let's take a look at the table to see what happened next.
Suppose the price of BTC rose from $20,000 to $21,000, i.e. by 5%, how much will traders earn?
Also, let's assume that both friends were wrong and the price of BTC fell from $20,000 to $19,000, i.e. by 5%, how much will the friends pay for their wrong choice?
The example above shows that trading futures is a much riskier endeavor in terms of trading, as a 5% change in price and x10 leverage will see a trader make or lose half of his capital. However, trader Tim with his more conservative strategy would have to make 10 trades to achieve the same profit!
I guess futures aren't for me... Well, no, wait a minute. Let's look at the benefits of futures trading:
1. We don't need a real asset
While trader Tim was buying and selling real bitcoin on the exchange, Alex, with $2,000 in his pocket, was not using bitcoin himself to trade. How come? Simple. Futures is a contract. A contract that does not obligate you to buy or sell a real asset: all a futures trader needs is a price! It is the change in the price of an asset that allows Alex to make money on a drop in price. This means that the list of assets for trading is not limited to cryptocurrencies, it can be EUR/USD forex pair, a barrel of oil, and even TESLA shares!
2. We can make a profit on both ups and downs
Let's look at a slightly different situation. Both traders are confident that the bitcoin price will go down. So what do the guys do? Alex opens a short position with x10 leverage on Storm Trade, while Tim just sells bitcoin at the current price. Let the price of BTC also fall by 5%, then:
We can see that the picture has fundamentally changed. Alex remains on the plus side while the market is falling for a long time, while Tim stays "on his own".
3. Higher risk, higher profit
Thanks to the use of leverage, a trader can increase his capital multiple times.
I think we're clear! I'm ready to trade!
Hold on. Let's go back to the basics of futures trading fundamentals and break down a few more concepts:
Profit and Loss (PnL) is a visual representation of a trader's profit or loss. PnL can be realized, i.e. real or what is already in your wallet, and unrealized, i.e. it keeps changing depending on market conditions. Storm protocol commissions are deducted when positions are opened and closed, so they are always included in the realized PnL.
Funding is hourly payments between long and short traders. The party whose open position volume is larger pays. Why do I need fundings? It's simple! To create motivation to open a position in the opposite direction.
Let's take an example. Trader Alex, when opening the famous bitcoin long, got into the popular side of the market, i.e. conditionally most of the other traders are also sitting in longs. So, every hour he pays the fundy side of the shorts for following his heart and opening a popular position in the market. The bitcoin price is frozen in place, Alex is worried, because he keeps paying fundings. And then he decides to open a short, getting on the unpopular side of the market in order to receive the funding payments himself. Having received hourly funding, Alex gets back into a long position and waits for the price growth. The sheep are safe and the wolves are fed.
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