In our previous article, we provided you with a comprehensive introduction to futures and perps trading. Now, as we delve into the second part of this series, we venture even further into this subject.

Here’s what we’ll be looking at:

• Trading Glossary

• Useful Market Metrics to Keep Track

• Trading Strategies

• Risk Management

Trading Glossary: Zaros’ trading features

In this section, we will explore several of the trading features and tools that will be eventually offered by Zaros, while also providing explanations for those who may be less familiar with perpetual futures trading.

Order Types

To enhance the trader’s experience, there are various order types available, enabling them to participate in diverse strategies. Let's examine a selection of these types individually.

Market Order

A Market Order is a request to promptly purchase or sell an asset at the prevailing market price. While it ensures rapid execution, it may not secure the exact price visible at the moment of order placement, especially when market volatility is elevated.

Limit Order

A Limit Order, on the other hand, is an instruction to buy or sell the asset at a designated price or a more advantageous one. Execution occurs solely at the specified price or a better one, affording traders the flexibility to establish a target price and await the market's alignment with their desired level.

Trailing Stop Order

A Trailing Stop Order is crafted to track the movement of an asset as it advances in your favor. You establish either a trailing percentage or a fixed amount and if the market aligns with your position, the stop price adapts automatically. If the market shifts in the opposite direction by the pre-set percentage or amount, the order activates and transforms into a market order. This order type serves to secure profits while allowing for potential price gains.

TWAP Order

A TWAP Order serves the purpose of executing a substantial order over a specified time frame to mitigate its impact on the market. It fragments the order into smaller segments and evenly disperses them across the chosen time duration. This order type proves beneficial for traders seeking to evade price manipulation or excessive slippage when managing sizable positions.

Take Profit and Stop Loss (TP / SL)

These orders serve as essential risk management tools. Take Profit orders enable traders to specify a particular point at which, if the market moves in their favor and reaches that level, the order will automatically close at a profit. Conversely, Stop-loss orders operate on a similar principle but are employed to exit a position when it incurs a loss.

For example, if you wish to limit your losses to no more than 15% in a trade, you can establish a Stop Loss at that threshold, ensuring it becomes the maximum loss incurred in that position (excluding fees).

These orders are especially prevalent among technical analysis traders who strategically set TP or SL levels based on observed chart patterns.

Order Types

Traders have two choices when it comes to providing collateral for their positions:

Isolated Margin

In isolated margin mode, the margin amount is restricted to a particular position. This implies that you have the autonomy to determine how much of your funds you wish to allocate as collateral for a specific trade, without affecting the remainder of your funds.

Cross Margin

Cross margin utilizes all the funds available in your account as collateral for your trades. When one position moves unfavorably while another position is profitable, the gains can offset the losses, enabling you to maintain your position for an extended period.

The cross margin represents an advancement beyond the isolated margin, facilitating the simultaneous opening of multiple positions. However, risk management is crucial, as the liquidation of one position within the cross-margin selection can potentially impact all other positions, possibly triggering a cascade effect.

Funding Rate

In the previous article, the term "Funding Rate" was frequently mentioned. If you found it somewhat confusing, here's a straightforward explanation:

Funding rates represent periodic cash exchanges between holders of long and short positions. In bullish markets, the funding rate typically turns positive, leading traders with long positions to compensate traders on the short side. Conversely, during bearish conditions, the funding rate generally takes on a negative value, causing traders with short positions to pay those holding long positions.

Unlike traditional futures contracts, perpetual futures lack an expiration date. Traders can maintain their positions indefinitely unless they face liquidation. To ensure that perpetual contract prices align with those of their underlying assets, exchanges have implemented the funding rate.

The primary purpose of the funding rate is to facilitate the convergence of perpetual contract prices with the prices of the original assets. With ample liquidity, trading perpetual contracts closely resembles trading in the spot market.

On Zaros, as a way to address the liquidity fragmentation challenge faced by Perp DEXs, we developed a smart funding rate algorithm that takes into account the following parameters: Risk Tiers classified by our eCluster mechanism and off-chain volatility provided by custom Chainlink functions.

Slippage

In futures markets, it's not uncommon to find a disparity between the anticipated order price and the actual execution price. This phenomenon is commonly referred to as slippage. An example of this would be placing a market order to purchase ETH at the price of $1,800.00, and the execution occurring at $1,800.50.

Liquidation

Liquidation in futures trading happens when the value of a trader's position decreases to a specific threshold known as the liquidation price. If the market moves unfavorably, breaching or surpassing the liquidation price, the exchange automatically closes the position. To prevent liquidation, traders have the option to deposit additional margin funds.

Leverage

Leverage is the ability to control a large contract value with a relatively small amount of capital. Leverage is important to understand as it can yield outstanding profits but also entails the potential for significant losses.

For example, if you open a long position on BTC with 10x leverage and BTC experiences a 10% price increase, your actual gain will be 100%. On the other hand, if the market moves against your position, you’ll get liquidated if you don’t place an additional margin.

Trader Screens on Zaros

In order to reach a broader audience who wishes to trade on-chain, we’ll be enabling 3 different screen options that traders can access: Lite, Standard, and PRO.

• Lite Screen: Optimized for mobile users and beginners.

• Standard: Offers predefined layouts for tools and features.

• PRO: Delivers a customizable experience, granting traders the flexibility to position each component to best suit their preferences.

Useful Market Metrics to Keep Track

Now, let's delve into essential metrics that should catch every trader's attention. Understanding and consistently tracking them is crucial to achieving consistent and favorable trading outcomes.

Open Interest and Trading Volume

Open Interest (OI) and Trading Volume are two critical metrics, often causing confusion among new traders.

• Open Interest: Open Interest serves as a gauge for monitoring the number of unclosed positions within a specific contract, such as BTC perps or any other derivative. It reflects the total number of outstanding derivative contracts and provides insights into the overall active participation in the market.

• Trading volume: Conversely, trading volume pertains to the number of contracts that have been traded within a given period.

To illustrate, consider the options market (another derivative) as an example: If one trader holds 10 option contracts and subsequently sells them to another trader, the open interest remains unchanged (as it still represents 10 outstanding derivatives contracts), while the trading volume increases by 10.

Funding Rate

We've previously covered the definition and mechanics of the funding rate, and now let's explore how to take advantage of it to gain valuable insights into market dynamics.

As mentioned earlier, the funding rate's primary purpose is to facilitate the convergence of perpetual futures prices with spot prices, since there are no arbitrage opportunities between them (no expiry dates).

Here's how it works: When the number of long positions in the perpetual futures market surpasses the number of short positions, the funding rate turns positive: perps price > spot price. This means that long position holders pay short position holders, incentivizing the latter to aid in bridging the gap between futures and spot prices.

The opposite is true as well.

With this understanding, analyzing the funding rate in the most liquid markets can provide key insights into market sentiment, aiding in informed decision-making.

For example, if market sentiment appears to be bearish, characterized by a prevalence of short positions and a negative funding rate, it may suggest that the market is experiencing an exaggerated downturn and could potentially undergo a short squeeze—a scenario where numerous short positions are rapidly liquidated, causing a sharp upward price movement.

In traditional futures markets, traders often rely on the long/short ratio to gauge overall market sentiment. In the crypto industry, where perps dominate, traders can complement their analysis by considering both the long/short ratio and the funding rate, providing a comprehensive understanding of market sentiment and dynamics.

Liquidation Data

Among crypto futures traders, data on liquidations stands out as one of the most critical metrics, providing valuable insights into market sentiment and trading trends.

Through an examination of liquidation data, traders can grab insights such as:

• Potential reversal points

• Indications of market manipulation or significant whale activity

• End of a substantial price movement - be it a major rally or a steep decline.

Typically, traders incorporate liquidation data alongside other metrics to gain a more comprehensive understanding of the overall market.

Futures ETF (BTC)

This metric holds significance due to the presence of several BTC Futures ETFs listed on exchanges worldwide. Analyzing this data allows traders to understand the market sentiment prevailing among institutional investors.

What makes it intriguing is that, unlike perpetual futures contracts, these futures ETFs have specific expiration dates. This distinction enables traders to not only recognize disparities between the futures price and the spot price (in the form of a discount or premium) but also to derive valuable market insights regarding sentiment or the potential for arbitrage opportunities.

Trading Strategies

We've covered an array of topics, including trader types, trading glossary, and essential metrics. Now, you might be wondering how to apply this knowledge in practice. While we are not here to give you a trading course, let's dive into some of the most renowned trading strategies employed by the trader types introduced in part 1 of this series.

Technical Analysis Patterns

Technical analysis patterns often face skepticism, with some comparing them to "astrology for Wall Street." However, we're not here to pass judgment. Instead, let's explore some of the most famous patterns that serve as potential entry signals for many traders.

Rounding top

A rounding top pattern is a technical analysis tool that emerges when plotted price movements take on the appearance of an inverted "U." Typically observed at the conclusion of prolonged upward trends, rounding tops often indicate a potential reversal in price direction, representing a short trigger.

Ascending Triangle

The ascending triangle pattern emerges from price movements that enable the creation of a horizontal line connecting swing highs and a rising trendline connecting swing lows, thereby giving rise to a recognizable triangular formation. Traders often keep a close watch on triangle patterns, anticipating potential breakouts in either the upward or downward direction.

Typically, an ascending triangle is deemed a continuation pattern, carrying significance when it appears within an existing uptrend or downtrend. Following a breakout from the triangle pattern, traders often exhibit a strong inclination to buy or sell the asset, depending on the direction of the price breakout.

Flag Pattern

Flag patterns are continuity indicators comprising two parallel trendlines that can incline upward, downward, or remain horizontal. Usually, an upward-sloping flag (bullish) emerges as a momentary pause within a declining market, while a downward-sloping flag (bearish) signals a brief interruption amid an ascending market trend. The formation of a flag pattern is often accompanied by diminishing trading volume, which typically picks up as the price breaks out of the flag configuration.

Momentum Indicator: Moving average convergence/divergence (MACD)

The Moving Average Convergence/Divergence (MACD) stands as a powerful momentum indicator utilized for tracking trends. This indicator reveals the relationship between two exponential moving averages (EMAs) applied to the price of an asset. The MACD line is calculated by subtracting the 26-period EMA from the 12-period EMA.

MACD = 12-Period EMA − 26-Period EMA

Momentum trading demands a high level of mental discipline. Success in this trading approach relies on your ability to maintain composure when things are progressing favorably and to exercise patience when your targets remain elusive.

Identifying market momentum involves attention to the EMA to spot uptrends and downtrends. When the EMA ascends, it signals bullish momentum, while a descending EMA suggests bearish momentum. Additionally, the strength of the bulls or bears can be assessed by observing the slope of the MACD histogram. An upward slope indicates the bulls are gaining strength, whereas a downward slope suggests growing bearish power.

Here are some takeaways from the MACD:

• Crossing Above Zero: Bullish Signal

• Crossing Below Zero: Bearish Signal

• Turning Up from Below Zero: Bullish Shift

• Turning Down from Above Zero: Bearish Shift

Hedge

The final strategy we'll discuss is hedging. As mentioned in Part 1, hedging is a common practice among mining companies, investment managers, and even everyday traders. It's a way to safeguard their portfolios.

Now, let's consider how a Bitcoin miner could use perpetual futures to protect their mining operations:

For miners, hedging is crucial since their profits depend on the price of Bitcoin. When BTC's price rises, they make money, but if it takes a nosedive, it could lead to substantial losses. These losses could accumulate, potentially putting the miner or mining company in financial trouble.

Below, you'll find a chart from Deribit that illustrates the total business profit of a mining company with and without hedging.

The company that chooses to hedge, has the advantage of locking in their profits at a stable rate. This means they don't need to worry too much about price fluctuations. However, it's worth noting that by taking short positions in the market, they limit their potential profits if the market goes up. This is an example of a delta-neutral approach, but companies can adjust their strategies to achieve different hedge rates based on their goals.

On the other hand, the company that opts not to hedge can potentially earn higher profits if the price of BTC rises. However, they also expose themselves to the risk of significant losses if the market takes a downturn.

For these players, it's crucial to thoroughly understand the market and develop a strategy that aims for the best risk/reward ratio!

In the next section, we’ll be talking about risk management.

Risk Management

To be honest, risk management is really what distinguishes traders from the ones that are actually profitable in the long run and the ones that look like they are riding a roller coaster.

Despite sounding boring, it's really important to understand its concepts.

In perps trading, it's essential to recognize that increasing leverage also increases risk. Likewise, reducing your margin amplifies the level of risk. While there's usually a direct link between risk and potential return – where higher risk often correlates with greater expected returns – you must question the wisdom of such a strategy if it exposes you to the possibility of liquidation and complete loss.

It's absolutely crucial not to invest more than you're willing to lose.

While it might seem tedious when the market is moving sideways, and you're tempted to open a 100x position, remember that a sudden market event can lead to liquidation with just a 1% move against your position.

When engaging in perps trading, it's wise to develop a solid strategy, allocate a reasonable margin to support your trades and select a leverage level that aligns with your comfort zone. If you're inclined to take risks with a 100x trade, only do so with funds you can comfortably lose.

Additionally, to maintain a sense of control and avoid emotional roller coasters, establish stop-loss and take-profit parameters in line with your trading strategy. This way, you can determine the maximum potential gains or losses for each trade.

Final Message

We've reached the end of this extensive article on perpetual futures trading. In the near future, you'll have the opportunity to explore our platform as we prepare to launch a testnet version. To stay up to date with Zaros, be sure to follow us on Twitter and join our community Discord.

Feel free to reach out with any questions you may have!