Contract trading is a powerful financial instrument that allows traders to speculate on the price movements of various digital assets. While it offers the potential for significant returns, it also carries inherent risks. Understanding how to use this tool effectively is crucial for anyone looking to navigate the volatile cryptocurrency markets.
This guide will walk you through the fundamentals of contract trading, covering the main types of contracts and providing step-by-step instructions on how to execute trades.
What Are the Main Types of Contracts?
There are three primary types of contracts available on most major trading platforms: Perpetual Contracts, Delivery Contracts, and Options Contracts. Both Perpetual and Delivery Contracts can be further divided into USDT-Margined and Coin-Margined variants.
- Perpetual Contracts: These contracts have no expiration date, meaning they do not settle on a predefined date. This allows traders to hold positions for as long as they wish, provided they can maintain the required margin.
- Delivery Contracts: Unlike perpetual contracts, these have a fixed settlement or delivery date. Common expiry periods include weekly, bi-weekly, quarterly, and bi-quarterly cycles.
- Options Contracts: These give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specific price on or before a certain date.
Traders can use these instruments to go long (speculate on price increases) or short (speculate on price decreases), or to hedge existing spot market positions against adverse price movements.
Preparing for Your First Trade
Before you can start trading contracts, you need to complete two essential setup steps: transferring funds and configuring your account settings.
Step 1: Transferring Funds
To begin trading, you must move assets from your funding account to your trading account.
- Navigate to the 'Assets' section of your trading app.
- Select 'Transfer'.
- Choose the currency you wish to transfer (e.g., USDT).
- Select 'Funding Account' as the source and 'Trading Account' as the destination.
- Enter the amount you want to transfer and confirm the action.
Step 2: Configuring Account Settings
Properly setting up your trading account is vital for risk management.
- In the trading interface, click on the account information icon.
- Select 'Trading Settings'.
Here, you can configure critical options such as:
- Account Mode: Choose between different margin modes.
- Order Mode: Toggle between different execution styles.
- Leverage: Set your desired leverage level (use with caution).
A Guide to Perpetual and Delivery Contracts
Executing Trades with Perpetual Contracts
Since perpetual contracts have no expiry, they are popular for both short-term and long-term strategies.
How to Open a Long Position (Buy)
If you anticipate the market price will rise, you can open a long position.
- Go to the 'Trade' section and select your desired trading pair (e.g., BTC/USDT).
- Choose 'Perpetual' and then 'USDT-Margined'.
- Select the specific contract, such as BTCUSDT Perpetual.
- Choose your margin mode (Cross or Isolated) and order type (e.g., Limit Order).
- Set your leverage, entry price, and order quantity.
- Click 'Buy/Long' and confirm the order.
How to Close a Long Position (Sell)
You can close your position from either the main trading page or your positions tab.
- Navigate to 'Positions'.
- Find the open long position you wish to close and click 'Close'.
- You can choose to close at a specific 'Limit' price or use a 'Market' order for immediate execution.
- Enter the quantity and execute the closing order.
To manage risk effectively, consider using stop-loss and take-profit orders. These advanced tools allow you to automatically close your position at predetermined price levels, helping to lock in profits or cap potential losses. For rapid liquidation, a 'Close All' market order is also available.
How to Open and Close a Short Position
The process for opening a short position (selling) is identical to going long, except you click 'Sell/Short' when initiating the trade. Closing a short position involves buying back the contract to realize your profit or loss.
Navigating Delivery Contracts
The trading process for delivery contracts is very similar to perpetual contracts. The key difference is that you must select a contract with a specific expiry date (e.g., a weekly contract). The mechanics of opening long/short positions and closing them remain the same.
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Understanding and Trading Options Contracts
Options are more complex derivatives that provide the right to buy or sell an asset at a set price before a certain date. They are excellent for sophisticated strategies involving volatility or hedging.
Trading Call Options (Bullish Outlook)
A call option gives you the right to buy the underlying asset. You would buy one if you believe the price will rise significantly.
Opening a Call Option Position
Platforms often offer different interfaces for traders:
- T-shaped Quote (Professional Mode): Offers the most comprehensive view of all available strike prices and expiries.
- List Navigation (Standard Mode): Provides a quicker way to select from common expiry dates and types.
- Simplified Mode: Offers an intuitive, guided process for beginners.
A general process involves:
- Selecting 'Options' from the trade menu.
- Choosing the underlying asset (e.g., BTC).
- Selecting 'Call' options.
- Picking an expiry date and a strike price.
- Entering your order details (price, quantity) and executing the trade.
Closing an Options Position
You can close an options position before its expiry date from your 'Positions' tab. Select the option, click 'Close', specify your parameters, and confirm. Remember, most platforms use European-style settlement, meaning exercise only happens at expiry, but positions can be traded until then.
Trading Put Options (Bearish Outlook)
A put option gives you the right to sell the underlying asset. You would buy one if you anticipate the price will fall. The process for trading put options is the mirror image of trading calls; you select 'Put' instead of 'Call' when initiating your trade.
Frequently Asked Questions
What is the difference between a perpetual contract and a delivery contract?
The core difference is the expiry date. Perpetual contracts never expire, allowing for indefinite holding, while delivery contracts have a fixed settlement date (weekly, quarterly, etc.) upon which they are settled.
How does leverage work in contract trading?
Leverage allows you to open a position much larger than your initial capital. For example, 10x leverage lets you control $1000 with only $100. While it magnifies potential profits, it also significantly amplifies potential losses, making risk management crucial.
What are the main risks of contract trading?
The primary risks include high volatility, liquidation (where your position is automatically closed if losses exceed your margin), and market gaps or slippage that can cause orders to execute at unfavorable prices. It is essential to only risk capital you can afford to lose.
What is the purpose of a stop-loss order?
A stop-loss order is a risk management tool that automatically closes your position at a predetermined price level. It is designed to limit your loss on a trade if the market moves against your prediction.
Can I use contracts to hedge my spot portfolio?
Yes, absolutely. A common strategy is to open a short contract position against a spot holding. If the market price falls, the loss in value of your spot assets is offset by the profit gained from the short contract position.
What happens if my option expires "out of the money"?
If an option expires and is not profitable to exercise (out of the money), it simply expires worthless. You lose the premium you paid to acquire the option, but you have no further obligation.