I was bored. I sat at home in front of the screen of the exchange terminal and watched the sluggish saw on the BTC chart. Like any professional trader, I hate low volatility! But even more, I hate the impotence of the unknown, the future. We all analyze the past perfectly, but when it comes to rapid price fluctuations, we are not ready for this and worse, when the system fails at the most inopportune moment. At this moment, full of drama, we furiously beat on the keyboard buttons, hit the mouse and squeeze to creak teeth, but on the screen we see a painfully familiar message about the overload of the system.

Do you know this? Yes, it is a favorite and at the same time hated by many traders exchange Bitmex.

There are enough reasons for indignation: an incomprehensible explanation for the commissions, own price quotation, low speed of order processing, accusations of price manipulation and of course the notorious overload of the system.

But why is this exchange so popular with professionals?

Of course, this is an opportunity to trade instruments in both directions, huge credit levers or leverages, the highest liquidity for BTC, a thought — out and convenient terminal, but, as for me, the most important thing is the opportunity to trade futures on Bitcoin, as if it were not futures, but the most ordinary spots!

Spots are what you trade on traditional exchanges like Coinbase, Binance, Poloniex, etc. You can exchange BTC for alternative cryptocurrencies (altcoins), but when BTC is growing — you’re just waiting!

Similarly, you wait when BTC is falling down, all you can do is exchange it for one of the so-called stablecoin (USDT, TUSD, etc.) in the calculation to buy the instrument where, in your opinion, the bottom was formed.

Here you expect the risks associated with the liquidity of “stablecoin” (I write in quotation marks, because these tools are, in fact, nothing is provided, nobody guarantees you anything, and seems like the gateway to exchange for Fiat currency is only in words and in marketing materials, whereas in fact, you become holders of shitcoins, which in the crypto market a little less than all). Add here meager earnings, unless you are the lucky owner of a couple of tens or better than hundreds of Bitcoins and the sad picture will be complete.

Spot exchanges are pretty boring, although in 2017 few people complained of boredom. But the days of the rampant rise of Bitcoin passed away and even altcoins are not trying to reach the moon. It is no coincidence that since 2018 active traders have turned their views on a new type of contracts — Futures. I’m not talking about traditional futures, which can be purchased on well-known exchanges such as CBOE or CME available to selected traders because of certain difficulties.

I’m talking about a special kind of derivatives on cryptocurrency exchanges — perpetual futures contracts or Swaps. This is exactly what you are trading on Bitmex or OnederX, under the name of XBTC/USDBTC_P. And this is exactly what is interesting for traders today and will be interesting tomorrow! And while market pioneers like Bittrex or Kraken are trying to win back the audience by making terrible and rather useless interface updates, new players are coming to crypto with up-to-date tools and understanding what the trader needs here and now!

Let’s talk about this a little bit more.

Swap Futures

The first thing you need to know about Swap is you’re trading OPTIONS not actual Bitcoins. That means you can sell short of buy long like you bet on your favorite horce on weekends. In both case it gives you a profit apart of idle waiting on spot exchange. Feel the difference!

So, if you could profit from the ride up and down, why wouldn’t you?

Exchanges, that have this type of contracts doesn’t take Fiat currency but it let’s you go long or short on Bitcoin and it sets each of its contracts at 1USD. That means if Bitcoin worth $4000 and you buy $4000 worth of contracts you bought the equivalent of a single Bitcoin.

Now you could ask me about what’s the difference between futures and SWAP futures?

If you’ve ever traded Futures on a traditional commodities exchange you know that Future contracts have an expiration date. That means at some point the contract is automatically settled. When the close date comes your contract is settled and cashed out whenever you win or lose.

Futures can trade close to the current price like the spot price on traditional exchange, or they can trade at a significant difference. I mean the trading price could be $4000, but future contract is about 10000$.

With all that said, most of the traders I know don’t bother playing with the more traditional Futures Contracts. They focused almost exclusively on the much more innovative Perpetual Contracts — Swaps! Why?

- the Swap Contracts never expire

- they trade constantly

- they come very close to the current spot price

So perpetual contracts let you hold your orders forever if you want or close whatever you want. Moreover they let you open and close contracts as many times a day as you need.

Even realized you will never hold your contracts that long, the absence of artificial end date is an important advantage over traditional futures.

What’s all that you’re wondering? Hold your horses folks, I’m going to tell you about next powerful and dangerous aspects of many derivative exchanges.

Leverage and Liquidation

First of all I have to warn you hot heads, who are not an experienced trader against using leverages at all. Just don’t do this.

To show you all tragic figures with using leverage I will give example here:

Let’s say you will have not heard me and decided you are trading superhero. So you have opened an order short at $4000 on BTC expecting it goes down. Your leverage is 10x, not so high, right? But even this way you got only about 10% till your order will be liquidated, it’s $5000 and most of us have seen many situation on BTC in the nearest past when price suddenly rose up or fell down at least for a couple hours.

What? You don’t realize that liquidation means? I will say a word about it but further, now I continue with leverage.

Using leverage when you’re not ready is like gambling and you are not suppose to play with blinded destiny aren’t you? Hope you are enough smart to listen to me and let’s not to return this way again.

Fortunatelly, all futures crypto exchanges has some of the most advanced stop options, from stop limits to trailing stops. With a stop-loss option you can set a target sell price or a price to take profit and a stop price at the same time. It’s bloody convenient especially when price behaves like a mad rocket or shooted star.

Use stops every time I mean every single trade if you want to save most of your money. And I recommend you choose a market, not limited, stop to avoid an Ooops situation. Especially on Bitmex where the price easily could slide through your limit stop and guess what will happen at the end?

Sadly, I’ve watched a number of traders who trades with high risky leverage like 25x and above without setting stops and being liquidated. It’s like a kick under your belly, you know, very painful!

If you’re getting liquidated it’s because you’re not practicing good money management.

Risk management is a thousand times more important than your best trading strategy!

There’s another aspect that you need to understand right now before you go any further, the liquidation price.

Ok, go ahead, what is liquidation?

A simple thing is liquidation is the price where you lose 100% of what you risked on a single trade.

What does that mean?

It means the most you can ever lose are all the assets you put up on a single trade. If you have got 1BTC on you account but you put up 0.01BTC, you can only lose 0.01BTC, no more.

That’s a completely differ from traditional exchange where to get a margin you need a buffer of cash in your account, usually double what you’re trading to cover a margin call.

What’s a margin call?

Let’s say you put up one grand of dollars on wheat at 10X leverage which equal betting 10 thousand dollars.

Next day your wheat opens down 50%. It blew through your limited stop and you have lost 5 thousand dollars. Just think about: you have lost your original thousand of dollars and besides you owe 4 thousands moreover!

And your partner has left a million unanswered messages with money claim.

That’s a margin call. And it is worse than a call from Kevin Spacey to your kiddo. It’s a joke.

Good news here in what can’t happen in crypto due to liquidation trigger. Yeap, I have just told your about not to being liquidated but sometimes this mechanism could save you ass from worse problems!

There’s no way for the most of exchanges to come and get more BTC from you if a trade goes against you so they came up with the liquidation price as a awesome solvation. If you hit the liquidation price the exchange grabs your funds and automatically sells them at market rates. It’s how they avoid having people hold two or more times the number of BTC in their account to do a margin trading.

So, summarizing all this I have said above, there’s two ways to make sure you never get liquidated:

Always use stops Don’t use too high leverage

But your stop should not be too close to the liquidation price either the high leverage makes the liquidation price too close for comfort. The higher you set, the worse it gets.

Risk management

Did you remember this behind:

“risk management is a thousand times more important than your best trading strategy!”

No? Go back, find this rule and repeat until it would be clear for you.

How do we practice good money management?

The most obvious thing is that you should not risk more than X% of your capital per trade. For example, if we trade a deposit of $10,000, then according to the rule, we should not allocate more than, for example, $500 per transaction.

At the same time, the smaller the amount of the initial order, the further your stop can be located. For example, when entering the market for $100, you can set a stop at 300–400 points from the entry point, at the entrance to $500–100 points, and at $1000–50 or less points (tight stop)

Based on the above, we can see that the risk can be quite different when using this rule. The X% rule can also be applied to a broader concept, which means, for example, that at any given time the risk of an open position should be no more than X% of the balance at the time of entry into the transaction.

This means that the total net loss on all open positions (regardless of how many positions we have opened) should not exceed $1000, taking into account that our total deposit is $10000. Some traders use the 5%, 10% or more limiter according to this logic. It all depends on how much you are willing to risk. I figured out that if you’re only putting up 1% of your money on a single trade, like so many traders recommend you to do, you’re leaving a lot of money on the table. That means 99% of your cash is sitting on the sidelines doing nothing.

Perhaps the most popular concept in terms of risk/reward ratio is to place this ratio 1 to 2. This means that if you risk $100 per trade, you should have a potential profit of $200. This approach combines money management and takes into account the interests of the strategy.

By the way, the ratio of 1 to 2 is not invented by chance. This ratio of risk and profit means that in case of loss, you will be able to recover the lost funds in the next transaction, if it is successful, and still make a profit. In addition, the risk/profit ratio of 1:2 will also help to smoothly recover losses, where as the base capital is taken at $10,000, following the rule of X%, and trading strategy with win rate (win rate) more than 50%.

Difference between spot price and a future SWAP price

Many of crypto exchanges with future trading set their own price rates based on spot exchanges rates as you can see below by OnederX. Bitmex exchange do the same but uses Bitstamp and Gdax rates.

Here’s all you need to really know. These sorts of prices are rarely in line with the spot price. Usually it’s trading above or below the spot price.

If it’s above the price, it’s trading at a “premium.” If it’s below, it’s trading at a “discount.”

So the price given you at future cryptocurrency exchange can work for you or against you.

Guess you have got a question about why all this exchanges put these prices?

Switching to multiple exchanges helped them to protect against that kind of market manipulation when one exchange don’t have enough liquidity or some whales trying to crush the price at one exchange to liquidate many small trades on another.

Now you have known enough to decide for youself either go trade to these Oneder’ful eXchanges or stay with old farts at spot exchanges, you choose.

The risk is still there, but the profits are slow and sluggish. If you didn’t grow up slinging futures on the exchanges in the 80s, you’ve got another chance to live the dream of big risk and big reward.

Happy trading.