What is Futures Trading?

• Futures trading is a type of financial derivative product that provides investors with more profit opportunities than traditional spot trading. By using leverage and shorting, investors can magnify their potential profits when they predict that an asset's price will rise or fall. Investors only need a small amount of investment capital to operate larger amounts of assets to seize market opportunities. For example, if investors believe that the price of an asset is about to rise, they can choose to buy long; if they think the price will fall, they can choose to sell short, thereby making profits from price fluctuations. In this process, choosing the appropriate leverage ratio is key, because leverage can significantly increase profits while also magnifying the risk of losses.

How Futures Trading Works

• The basic logic of futures trading is to allow investors to use leverage, borrowing funds to amplify the size of the trading volume and potential gains. This method allows investors to earn profits by predicting the rise or fall of market prices without fully investing in the actual trading amount.

• Take investor A as an example: Assume that there are 10,000 USDT in A's account. If A predicts that Bitcoin (current price is $50,000) is about to rise, A can borrow 90,000 USDT from a platform (such as Ourbit) and use the 100,000 USDT to purchase a position worth approximately 2 Bitcoins. If the price of Bitcoin rises to $60,000 as expected, A can choose to continue holding or close the position and sell. If the position is closed, assuming that the profit is 120,000 USDT, after paying back the borrowed 90,000 USDT, A still has 30,000 USDT, and after deducting the original investment, the net profit is 20,000 USDT.

Things to Note

1. Use of leverage: The amount A borrows depends on their risk tolerance. The higher the leverage used, the greater the potential returns and risks will be.
2. Market prediction: A’s choice to be bullish (buy/long) or bearish (sell/short) depends on their prediction of futures market trends.
3. Fund management: After making a profit, A can choose to continue holding, make additional investments, or close part or all of the position.
4. Risk management: If the market moves in the opposite direction A predicted, A may need to add additional funds to prevent liquidation.
5. Futures trading offers the potential for high profit through the use of leverage, but it also comes with high risks. This trading method requires investors to have high market prediction capabilities and risk management capabilities.

Advantages and Disadvantages of Futures Trading

1. Leverage: Through the use of leverage, futures trading allows investors to leverage larger trading volumes with smaller funds, leverage up to 125x. These high-leveraged products give investors the opportunity to earn high returns when they correctly predict market movements.
2. Faster profit opportunities: Futures trading offers faster profit opportunities compared to spot trading. With appropriate leverage, it is possible to double your capital with a single positive market move.
3. Making profits by short: Futures trading allows investors to make profits by selling short when the market is expected to fall, which is not achievable in the spot market.
4. Hedging and risk management: Skilled investors and miners can use futures trading for hedging to mitigate the downside risk of holding spot.

1. Risk of liquidation: Due to the use of high leverage, small reverse market movements may lead to huge losses or even the loss of all funds, which is called "liquidation."
2. Risk of "pin bar": Sharp market fluctuations or "pin-in" may lead to large instantaneous losses, especially when high leverage is used. This risk is particularly significant.

Explanation of Common Terms in Futures Trading

Margin

• Definition: Margin is the amount that a trader must deposit to open a position. It serves as a safety measure to ensure that traders can cover possible losses in leveraged trading.
• Calculation: The amount of margin is usually equal to the market value of the position divided by the leverage used. Formula: Margin = Position Value / Leverage.

Maintenance Margin

• Definition: The minimum margin requirement for maintaining a position, below which additional funds must be deposited or forced liquidation may occur.
• Adjustments: Maintenance margin requirements may increase or decrease depending on market volatility and the level of risk taken by the trader.

Maintenance Margin Rate

• Definition: This is the threshold that determines when margin must be increased or forced liquidation may be triggered.
• Application: If the margin rate of a position falls below the maintenance margin rate, automatic position reduction or liquidation will be triggered.

Position Margin

• Composition: Position margin includes the initial margin required to open a position and possible closing fees.

Order Margin

• Composition: Order margin is the funds reserved to support all unfilled active trading orders.

Starting Margin

• Composition: This is the minimum margin required to open a position. Your starting margin is dependent on margin rate requirements and is calculated based on the leverage size.

Margin Ratio

• Calculation: Formula: Margin Ratio = (Maintenance Margin / (Account Total Equity - Isolated Position Unrealized PNL - Isolated Position Margin)) * 100%.
• Importance: When the margin ratio reaches 100%, it indicates that the position is at risk of being reduced or liquidated.

Margin Mode

Isolated

• Definition: Isolated Margin is a margin mode in which a specific amount of margin is allocated to each trading position. This mode allows traders to manage the risk of each position individually.
• Function: If the loss of a position causes the margin level to fall below the maintenance margin, the position will be automatically closed (forced liquidation), preventing one losing position from draining all funds in the account.
• Flexibility: Traders can increase or decrease the margin allocated to a specific position at any time based on market conditions or their own risk management strategy.

Cross

• Definition: In cross margin mode, margin is shared across all positions.
• Features: In this mode, all positions share the same pool of margin, thereby reducing the risk of liquidation caused by a single position but also increasing the risk that may arise from multiple positions.

Mark Price and Trigger Price

Mark Price

• Definition: The mark price is typically the reference price used in derivatives markets to calculate unrealized profits and losses. It is based on the index price in the global spot market, adjusted for funding rate differences.
• Purpose: This price mechanism helps prevent market manipulation and non-market price fluctuations, providing a more stable trading environment.

Liquidation Spread

• Description: This is an important risk management tool that shows the maximum possible gap between the expected liquidation price and the mark price of the current position. It helps traders understand and manage potential liquidation risks before actual liquidation occurs.

Trigger Price

• Definition: The trigger price is a predetermined price set on the trading platform. When the market reaches this price, specific conditional orders, such as stop-loss orders and take-profit orders, will be triggered.
• Function: It allows traders to set orders for automatic execution at specific price points to manage the timing of entering and exiting the market, effectively controlling risks and capturing profit opportunities.

Different Order Types in Futures Trading

Market Order

• Definition: A market order allows you to instantly place buy or sell orders for an asset at the best current market price available. It is used when traders wish to enter or exit the market quickly.
• Operation: If the market order cannot be fully filled at once, it will continue to be executed at the changing best available price until fully filled.

Limit Order

• Definition: A limit order allows a trader to set a specific buy or sell price. The limit order will only be executed if the market price reaches your limit price (or better).
• Features: Limit orders provide price control but do not guarantee a transaction. They are often used to set price targets in the hope of buying below the current market price or selling above it.

Trigger Limit Order

• Definition: A trigger limit order is a conditional order where the trader sets a trigger price. Only when the market reaches that price will the order be activated and attempt to execute.
• Features: This type of order does not freeze funds before being triggered; whether the order can be successfully triggered depends on market price and liquidity at that time.

Explanation of Take Profit/Stop Loss (TP/SL)

TP/SL

• Function Description: Traders can set take-profit and stop-loss for specific positions by entering the desired price and quantity. When the market price reaches the specified TP or SL price, the system will execute at the best available price and automatically close the corresponding position quantity.

Position TP/SL

• Operation: This function applies to the entire position, including any subsequent addition or reduction operations. When the market price reaches or exceeds the set trigger price, the system will automatically execute at the best price, closing the entire position and canceling the TP and SL settings.

Moving TP/SL

• Definition: This is a dynamically adjusted stop-profit and stop-loss setting that allows traders to automatically adjust stop-loss points based on market price changes. If the market price reaches the highest or lowest point within the callback range set by the trader, the system will automatically execute at the optimal price, thereby protecting profits or reducing losses.

Forced Liquidation

• Trigger Condition: When the margin level of a position cannot be maintained above the required minimum maintenance margin, the system will automatically perform forced liquidation to prevent further capital losses. Forced liquidations are usually triggered during periods of severe market volatility.

Market Price Close and Flash Close

• Market Price Close: Allows traders to close positions immediately at the best price in the current market after triggering specific conditions.
• Flash Close: If the order fails to be completed at one time, the system will continue to try to close the position at the current best available price until the entire order is completed.

Unrealized Profit and Loss / Realized Profit and Loss

• Unrealized Profit and Loss: This refers to the profit and loss of open positions estimated based on the current fair price, excluding any trading fees and capital fees.
• Realized Profit and Loss: This reflects the actual profit and loss generated by all closed positions, including related trading fees and capital fees. This part of the profit and loss will be reflected in the account balance after the account is liquidated.

Trailing Stop Loss

• Function Description: Trailing stop allows you to set a stop-loss point that is dynamically adjusted with the market price to lock in potential profits or limit possible losses. This setting allows the stop-loss point to move favorably with the market price, optimizing the trading strategy.

Trading Fees, Funding Fees, and Countdown

Trading Fees

• Position Opening Fees: A fee that traders must pay when opening a new position, pre-calculated by the trading platform based on the size and type of the transaction.
• Position Closing Fee: The fee a trader pays when closing a position, also calculated based on the size and type of trading.
• Trading Fee: The actual fee paid or charged by a trader when executing a buy or sell order, usually calculated as a percentage of the transaction amount.

Funding Rate

• Definition: Funding fees are a mechanism used in perpetual futures trading to ensure that the price in the futures market is close to the price in the spot market.
• Calculation and Exchange: Funding rates are usually updated every 8 hours, specifically at 0:00, 8:00, and 16:00 (UTC+8). This rate determines the cost of funds that need to be exchanged between buyers and sellers. Its purpose is to regulate market supply and demand and prevent prices from deviating from the spot market.

Countdown

• Application: On the trading platform interface, the update countdown of the funding rate is usually clearly displayed to help traders understand the specific time of the next funding fee exchange, allowing for trading strategy adjustments.