Newbie traders are often interested in the futures and options markets due to the promise of high returns. KOL's articles about huge profits and numerous advertisements from derivatives exchanges offering 100x leverage are irresistible to most people.
While traders can effectively increase profits with periodic derivatives contracts, it only takes a few mistakes to turn the dream of making "huge" profits into a nightmare and empty-handed in an instant. Even experienced investors in the traditional markets fall victim to some specific problems in the markets. cryptocurrency.
Derivatives crypto works similar to a traditional market because the buyer and seller enter into a contract depending on the underlying asset. Contracts are not transferable across different exchanges, nor are they withdrawn.
Most brokers offer options contracts priced at Bitcoin and ETH so profit or loss will be different according to the price movement of the asset. Options contracts also provide the right to buy and sell at a later date at a predetermined price. This gives traders the ability to build leverage and hedging strategies.
Let's learn 3 common mistakes to avoid when trading futures and options.
Convexity can kill your account
The first problem that traders face when trading derivatives cryptocurrency is the convexity. In this case, the margin deposit changes in value as the price of the underlying asset knife motion. When the price of Bitcoin increases, the investor's deposit increases in US dollars, allowing for more leverage.
The problem appears when the opposite movement occurs and the price BTC fall. As a result, the user's margin deposit decreases accordingly. Traders are often overexcited when trading futures, and positive factors reduce their leverage as prices BTC increase.
Therefore, traders should not increase their position just because of the transfer when the margin deposit value is increasing.
Separate margin brings benefits but also risks
Derivatives exchanges require users to transfer funds from regular spot wallets to the futures market, and some will offer separate margin for perpetual and monthly contracts. Traders can choose between cross-collateral (meaning the same deposit serves multiple locations) or separate.
Each option has its own benefits, but beginner traders are often confused and liquidated for not managing margin deposits correctly. Separate margin, on the other hand, is more flexible to support risk, but requires additional maneuvering measures to prevent over-liquidation.
To solve this problem, always use cross margin and manually enter a stop loss for each trade.
Not all options markets are liquid
Another common mistake is to trade with the illiquid options market. Trading illiquid options increases the cost of opening and closing positions, and options contracts already have embedded costs due to the high volatility of cryptocurrencies.
Options traders must secure an open interest (OI) of at least 50 times the number of contacts wishing to trade. Open interest represents the number of outstanding contracts with strike price and expiration date that have been bought or sold previously.
Understanding potential volatility can also help traders make better decisions about the current price of options and potential future changes. Remember that options' premiums increase with higher potential volatility.
The best strategy is to avoid buy and sell orders with excessive volatility.
In short, it takes time to master derivatives trading, so trader should start small and test each function and market before placing big bets.