Contract trading is a type of play on major exchanges, which has long appeared in the stock market and other trading markets. In fact, contracts amplify your funds through leverage, allowing for quick doubling of profits by buying up or down, making it very popular among cryptocurrency investors. However, there are many rules for contract trading, and for newcomers in the crypto space, many may know nothing about how to trade contracts. Below, we will teach you how to trade contracts, providing the most comprehensive beginner's guide.
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How to trade contracts? Beginner's guide illustration
What is contract trading?
Contract trading is a form of financial trading that allows traders to buy and sell futures contracts. These contracts represent an agreement to buy or sell an asset at a specific date in the future. In contract trading, traders do not actually own the asset but trade on the value of the asset. Contract trading usually takes place on exchanges and is regulated.
How to trade contracts?
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First, you need to choose a secure exchange. The site owner recommends OKX, the second-largest cryptocurrency exchange by market capitalization.
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You can choose to register using a mobile phone number or email, follow the account rules to register and receive a verification code, and complete the registration.
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After registration, Android phones will prompt you to download the APP, or you can directly click this to download the installation package.
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Enter the APP and click the personal center in the upper left corner to access the identity verification page. Follow the prompts to complete LV.1 basic verification, LV.2 advanced verification, and LV.3 video verification.
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- Transfer funds by clicking the transfer button on the [Trading] page, select [Currency], transfer assets from the [Funding Account] to the [Trading Account], fill in the [Amount], and click [Confirm]. If trading USDT margin contracts, transfer the currency as USDT; if trading coin-margined contracts, transfer the corresponding currency.
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- Click on the currency pair in the upper left corner, enter the currency in the search box, and select the corresponding contract type and margin type.
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What types of contracts are there?
Perpetual contracts: Perpetual contracts have no expiration date, allowing users to hold them indefinitely and perform their own closing operations.
Delivery contracts: Delivery contracts have specific delivery dates, including weekly, bi-weekly, and quarterly delivery contracts. When the specific delivery date arrives, regardless of profit or loss, the system will automatically deliver.
Margin types:
USDT margin contracts: This means you need to use the stablecoin USDT as collateral. As long as there is USDT in the account, you can trade contracts in multiple currencies, with profits and losses settled in USDT.
Coin-margined contracts: These use the underlying currency as collateral. You need to hold the corresponding currency before trading, and profits and losses are also settled in that currency.
- Choose between cross-margin or isolated margin.
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What do cross-margin/isolated margin mean?
Cross-margin means that all positions in the account share the same margin, allowing profits and losses from different positions to offset each other.
Isolated margin means that the risks and rewards of each position are independent, with the margin and profits and losses of each position calculated separately.
- Fill in the order information, selecting [Buy Long] or [Sell Short].
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What do Buy Long/Sell Short mean?
"Buy Long" means buying the contract at a suitable price and waiting for the market price to rise before selling (closing) to earn the price difference, similar to spot trading, referred to as "buy first, sell later." "Sell Short" means selling the contract at a suitable price first and waiting for the market price to fall before buying (closing) to earn the price difference, referred to as "sell first, buy later."
- After opening a position, you can check the order information under the [Position] section and set stop-loss or take-profit orders or perform closing operations.
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What to pay attention to in contract trading:
(1) Whether in single currency margin mode or cross-currency margin mode, when the margin rate <= 300%, the system will issue a warning to reduce positions, and you need to pay attention to the risk of reducing positions; when the margin rate <= 100%, the system will cancel orders according to the rules and trigger forced liquidation. Please pay attention to position management to prevent liquidation risk.
(2) In isolated margin mode, positions in single currency margin mode and cross-currency margin mode are independent and do not affect each other.
(3) In cross-margin mode, the same settlement currency in single currency margin mode shares one margin; in cross-currency margin cross-margin mode, all assets in the trading account are converted into USD based on the conversion ratio and shared as position margin.
(4) In cross-currency margin mode, if you enable [Automatic Borrowing], you do not need to hold USDT or the underlying currency to trade [USDT margin] or [coin-margined] contracts.
Contract trading profit and loss calculation method:
In contract trading, the most important part is the profit and loss calculation of the contract. Taking Huobi as an example:
Unlike traditional commodity futures, each Huobi contract is not anchored to a fixed amount of digital assets but to a fixed amount of USD. That is, the dollar value of a contract is always fixed.
One BTC contract represents Bitcoin worth 100 USD, while for other currencies, the face value of one contract is 10 USD.
According to information from Huobi's official help center, after investors open a position, unrealized profits and losses will occur with price fluctuations, and the calculation method is:
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For example: After I open a short position, the unrealized profit and loss in my account is -0.0001, with the unit being BTC. The calculation method for unrealized profit and loss corresponds to the first formula.
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Due to the leverage in contract trading, the investment risk is also very high. When the contract price moves against the investor (the unfavorable direction for long position holders is a price drop, while for short position holders, it is a price increase), it can easily lead to forced liquidation.
After the contract is liquidated, the investor's profit and loss will enter the realized profit and loss:
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The calculation method for realized profit and loss is:
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This part of the profit and loss cannot be temporarily transferred out of the contract account until 4 PM on Friday of that week, after all contracts' profit and loss have been settled. This system is also called the "No Negative Balance Settlement System for the Week."
Through the above introduction, I believe everyone has a better understanding of contract trading. I remind investors that contract trading carries significant risks and requires cautious trading, especially in choosing a reliable exchange, which can reduce the risk of the exchange running away after the investor's investment and better protect the investor's rights.