Everyone is talking about cryptocurrencies because research has shown that trading them in the futures market is the easiest and most reliable way to make money online. But many are not aware of the risks involved in trading futures.
Cryptocurrencies are currently all the rage on the internet, and everyone seems to be talking about them. This is because using cryptocurrencies has proven to be the quickest and easiest way to make money using the internet. There are also multiple ways to make money from cryptocurrencies. such as:
- Spot trading
- Staking
- Lending
- farming
- futures trading
- Defi jobs
- Shitcoins/meme tokens
- crypto arbitrage
- Airdrops
However, I will be concentrating on Futures trading and the risks that are associated with it throughout this article.
What exactly is Futures trading?
A Futures contract is an agreement to buy or sell a commodity, currency, or another instrument at a predetermined price at a specified time in the future. Futures contracts can also be used to hedge against the risk of price fluctuations.
In contrast to a conventional spot market, a futures market does not immediately “settle” the trades that take place there. Instead, two parties will trade a contract that stipulates the terms of the settlement to be carried out at a later time.
Additionally, users are not permitted to directly buy or sell the underlying commodity or digital asset when participating in a futures market. Instead, they are trading a contract that is a representation of those assets, and the actual trading of those assets (or cash) will take place in the future when the contract is exercised.
How does it work
Imagine that you have an idea for a business that would give you a huge return on your investment (ROI), but you don’t have enough money for startup capital. What would you do?
What you will do instead is borrow money from a benefactor, and if and when the business generates a profit, you will divide that profit with the benefactor who loaned you the money.
Risks associated with trading futures
Despite the fact that trading futures is one of the simplest and quickest ways to make money in crypto, there are risks involved in doing so that every beginner needs to be aware of before they begin trading. For example,
- Volatility
- Fundamental news
- High leveraging
Volatility
Because it is a decentralized market, the cryptocurrency market is a financial market that is open to participation from absolutely anyone and everyone. When there are an excessive number of transactions taking place on the blockchain, volatility occurs. This causes a sudden increase in the value of the asset, which, in turn, defies all predictions and ultimately results in its sale or destruction. (total depletion of your resources)
Fundamental news
When trading cryptocurrency, the news is one of the most important factors that can influence the market. Big crypto influencers, such as Elon Musk, can change the entire direction of the market with just one tweet, either to the upside or the downside. Other types of news factors, such as those listed below, also have a significant impact on the cryptocurrency market.
- CPI news
- FOMC meeting
- Earnings
Trading on days like these can be risky because the news will have a big effect on the market, which may not be something you can predict with your technical analysis.
High leveraging
One of the most significant risks associated with futures trading is the high degree of leverage that is commonly used. When trading futures, the most common cause of financial loss is almost always carelessness regarding leverage and the risks that are associated with it.
Margin requirements are established by exchanges at levels that are thought to be appropriate for clearinghouse-level risk management. It requires a minimum level of margins, which is mandated by the exchange, in order to offer the maximum amount of leverage.
For example, if the starting margin for crypto assets was 2.5 percent, this would imply leverage of 40 times. To put it another way, a trader who makes a deposit of $250 is able to open a position with a value of $100,000. This unequivocally demonstrates a high level of leverage, which can be defined as the capability of accepting enormous risks while simultaneously minimizing risk.
How to Avoid Potential Risks When Trading Futures
It is impossible to eliminate all of the risks associated with futures trading because, without those risks, it would not be possible to engage in futures trading. Because of this, the concept of risk management was developed.
Risk management
When trading, the processes that are put in place to help keep losses under control and to maintain a good risk-to-reward ratio are collectively referred to as risk management.
Although there is a possibility that risk management will not assist you in avoiding all of the risks described above, it can help you save money.
If we use the example of a trader who has a $200 account and only risks 3% of that account on each trade, we can see that in order for his account to be liquidated, he would have to hit 25 stop-loss orders, which is obviously impossible.
Because it is possible to avoid incurring losses in trading if you have a solid risk management strategy, every successful trader keeps a trading journal in which they document their strategy in an accurate and complete manner.
Technical Analysis
Gaining expertise at a professional level in technical analysis can also assist you in minimizing your exposure to risk when trading futures.
Because knowing TA would give you a deep understanding of how the market works and the steps you need to take to actually predict the price of an asset, you should think about learning it.
Conclusion
The futures market is not a form of gambling, nor is it a game of chance.
It’s all about making calculated risks in a market that offers limitless potential for profit; all you need to do is realize the potential to learn how to trade wisely in this market. It’s a market where everything is up for grabs.
