This article provides an overview of Futures Trading and a detailed guide on Futures Trading contract terms you'll encounter on our platform.
What is Futures Trading?
Futures trading involves a contractual agreement to buy or sell an asset at a predetermined price at a specified date in the future. These contracts are commonly used in commodities, currencies, stock indexes, and cryptocurrencies. They are typically used for two main purposes:
Speculation: Profiting from anticipated price movements.
Hedging: Reducing exposure to price volatility.
How It Works
When you enter a futures contract, you’re not directly buying or selling the asset. Instead, you’re trading on the expected future price. You can take:
A Long Position: You agree to buy the asset in the future, expecting the price to rise.
A Short Position: You agree to sell the asset in the future, expecting the price to fall.
Futures are leveraged instruments, meaning you can control a large position with a relatively small margin deposit. This amplifies both potential gains and potential losses.
Positions are marked-to-market daily, meaning profits and losses are settled at the end of each trading day. If your account balance falls below a required maintenance level, you may receive a margin call to deposit more funds.
Types of Futures Contracts by Duration
Futures contracts differ based on expiry or settlement dates, giving traders flexibility in strategy:
Type | Typical Duration | Description |
Daily Contracts | 1 day | Very short-term contracts, used for intraday speculation or hedging. |
Weekly Contracts | 1 week | Allow traders to capture short-term moves without long commitments. |
Monthly Contracts | 1 month (usually end-of-month expiry) | Commonly traded contracts on most exchanges; offer moderate-term exposure. |
Quarterly Contracts | 3 months (e.g., Mar, Jun, Sep, Dec) | Popular among institutional traders; align with financial reporting cycles. |
Perpetual Contracts | No expiry | Also known as perpetual swaps, these mimic spot trading but behave like futures. They are widely used in crypto. |
Custom Contracts | Varies (negotiated OTC or by institutions) | Less common for retail traders; tailored to specific hedging needs. |
A Simple Example
Let’s say a user thinks the price of Bitcoin will rise. BTC is currently priced at $50,000.
they enter a monthly futures contract to buy 1 BTC at $50,000, expiring in 30 days.
If BTC rises to $55,000 by expiry:
The user can buy at $50,000 and sell at $55,000.
Profit: $5,000
If BTC falls to $45,000 by expiry:
The user is still obligated to buy at $50,000.
Loss: $5,000
In real practice, the user could exit the trade early, adjust their position, or use stop-loss tools to manage risk, especially when using leverage.
Futures Trading Terms and Contract References
Basic Terms
- Order Book
An Order Book displays all open buy or sell orders posted by users on the exchange.
- Underlying Asset
The digital asset (e.g., Bitcoin) from which the price of a Futures or Perpetual Contract is set.
Understanding Prices
- Index Price
The calculated price of the underlying asset, derived from multiple external spot market prices.
- Market Price
The latest transacted price of an asset.
- Mark Price
A calculated "fair price," taking into account various market factors.
What is it used for?
Calculation of unrealized Profit and Loss (P&L).
Triggering of liquidations.
Safeguarding against market manipulation.
- Spot Price
The current market price for immediate trades.
Position-Related Terms
1. Types of Positions
- Long Position / Buy Position: Buying first to sell later.
Example: Owning 100 BTC contracts means you hold a long position.
- Short Position / Sell Position: Selling first to buy back later.
Example: If you've sold 100 BTC contracts, you're in a short position.
- Entry Price
The effective price at which you bought or sold when opening your position.
2. Contract Multiplier
The fraction of the underlying asset each contract represents.
Example: BTC-PERP has a Contract Multipler of 0.001, which means 1 contract represents 1/1000th of a Bitcoin.
- Position Size
The number of contracts you're trading.
- Notional Value
The total value of the position you hold, calculated as follows:
Notional Value = Current Mark Price x Position Size x Contract Multiplier
Example: If you have 100 BTC contracts at a Mark Price of $40,000, your Notional Value is $40,000 x 100 x 0.001 = $4,000.
3. Position Modes
- One-Way Mode
One-Way Mode refers to a specific position mode setting. When you set your position mode to One-Way Mode, you can only hold one direction per market, either long or short. This mode offers a straightforward way to manage your position, allowing you to change your position size and direction with ease.
- Hedge Mode
Hedge Mode is an alternative position mode setting. When activated, you can simultaneously hold two positions in opposite directions (both long and short). This mode is beneficial for users wanting to lock in unrealized P&L without closing their positions.
4. Leverage and Risk
- Leverage
The ratio of the initial margin to the order value. Higher leverage means higher risk but lower initial costs.
Example:
With 100x leverage, the initial margin is just 1% of the order value.
With 1x leverage, the initial margin is 100% of the order value.
- Risk Limit
A set of rules designed to minimize large liquidations and maintain good market integrity.
5. Margin Terms
- Initial Margin
The minimum amount you must have to open a position.
- Maintenance Margin
The minimum amount you must maintain to keep your position open. Failure to do so can trigger the liquidation of your position.
- Cross Wallet
Enables multiple digital currencies to serve as margin. The collateral can be used as margin for all markets.
- Isolated Wallet
Enables multiple digital currencies to serve as margin. The collateral can only be used as margin for the specific market.
6. Liquidation Process
- What happens
- The system will automatically execute a buy/sell order or undergo a partial liquidation if the risk limit is reached.
- If you have sufficient margin after executing a market buy/sell, the liquidation process will be halted.
- After an automatic buy/sell order, partial liquidation, your risk limit level will be downgraded.
- The system takes over your position and associated margin.
- Additional margin from the Freedx insurance fund may be used.
- If still not closed, Auto-Deleveraging (ADL) occurs.
- Liquidation Price
The price at which liquidation is triggered.
- Bankruptcy Price
The price at which your margin balance becomes zero.
- Auto-Deleveraging (ADL)
A process to close opposing positions from other traders when liquidation is unsuccessful.
- ADL Indicator
This shows your likelihood of being auto-deleveraged.
- Liquidation Notification
When liquidation, partial liquidation, or a forced market buy/sell occurs, the system can automatically send an email to notify you.
7. Profits and Losses
- Unrealized P&L
Current profit or loss that isn't finalized until your position is closed.
- Realized P&L
Profit or loss you've made when your position is closed.
8. Other Important Terms
- Funding Fees
Payments made between Long and Short positions.
- Basis / Basis Differential
The difference between the Spot Price and the Entry Price of the contract at expiration.
- Bid Price
The price a buyer is willing to pay (Bid) to enter a position.
- Ask Price
The price a seller is willing to receive (Ask) to enter a position.
- Market Makers
Provide liquidity by placing Bid and Ask prices in the Order Book.
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