Futures and options market practices guide

Note that every futures contract has a LONG leg and a SHORT leg which balance each other out. Pnl is applied, so that socialised losses can be handled. Technically it makes no sense to hold opposite simultaneous positions because it just cancels each other out. What Should You Trade? USD contracts trading at active futures markets are inverse, as mentioned in the beginning of this guide. In BitMEX you can not. So depending on your case you may want something different than someone else. Index to settle all of its contracts at expiration. Pnl for higher length contracts. OKCoin offers 10x and 20x contracts.

This determines your leverage. OKCoin and BitVC do not offer a demo version, but you can start small with 1 contract and test how Open Long, Open Short, Close Long, Close Short and different order types work. To experienced traders: do your thing. As an example we have Quarterlies contracts right now at OKCoin that settle on December 25. BTC initial margin used. OKCoin and none on BitMEX as of November 2015. Introduce yourself, be humble, and be ready to learn. If you create an account and use a service after clicking a link, Bitcoin Futures Guide may receive commission.

So if bitcoin price starts going up, futures traders will bid the price up. Each contract is worth 1 bitcoin notionally. If it goes down, I profit and he loses, if it goes up, he profits and I lose. BTC value of the contract goes up and you have bought an asset that is increasing in value. So Bob, who is long, can sell the contract at a different price to Sally, who wants to hold the long side of the contract where Ann is short. However, what if price goes down really fast, and my counterparty only had a little margin backing his position? Cross Margin can be very beneficial for swing traders who need to ride out turbulent, choppy price action, but new traders should NOT risk their whole account. Note that the market value of the contract fluctuates before settlement. This simply terminates the contract and sends the portfolio value of the losing counterparty to the winning counterparty. You pay a fee to enter the contract, and you pay a fee to exit the contract.

Some links to products or services contain affiliate IDs. You are not forced to hold the contract to expiration. COM, NOR ITS AFFILIATES, NOR ANY THIRD PARTY DATA PROVIDER MAKE ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND REGARDING THE DATA INFORMATION, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. Luckily at this point in 2016 there are numerous options for trading futures that are liquid and settle on short time horizons. Welcome to the best bitcoin trading guide on the internet. Ann then goes on BFE and she wants to short on bitcoin at market price. LONG side of my contract.

You may wonder: where do these contracts come from? Contact owner through web form if there are any issues or concerns and we will react as soon as possible. Quite the opposite, it costs you the initial margin required in order to enter the contract. Bitcoin daytraders, swingtraders, and investors. In general, we recommend that you trade any contract that has good liquidity and high volume. Can I sell a futures contract without actually owning it? The contracts are simply like stocks with a market price, which represents the agreements between traders to take the opposing sides of where price of bitcoin will go, so no actual bitcoins are being exchanged per se, however the profit and loss of money between counterparties is very real! Are you looking for a bitcoin trading chatroom?

There are three Chinese exchanges worth following: OKCoin, Houbi, and BTCC; there are two Western exchanges worth following: Bitfinex and Bitstamp. Others like BitMEX will liquidate you at this level where the exchange takes over your position to liquidate it into the market to prevent system loss of money. Babypips is a great resource for learning about technical analysis. There is a live orderbook of traders placing buy and sell orders and you are able to realize your profit or loss of money prior to expiration, just as if you were buying and selling a stock. Or you can just lurk and absorb the information around you. We have Bitcoin and US Dollar.

If price goes up on spot, a good futures exchange will have its contracts also going up in price, and then you can sell and get out. January 9 contract to expiration. BitMEX also has a weekly rebalancing for all their contracts, but currently their most popular product is the Daily 100x maximum leverage contract. We test each product thoroughly and are fully independent in our recommendations and information presented. In practice, these futures contracts are just like buying and selling spot market value. BTC of your initial margin will need to be kept for the position to be alive. Traders do NOT need to wait until settlement in order to get out of position and profit from the trade. You will then be able to trade futures contracts just like they are bitcoin spot. He wants to trade on the January 9 expiration contract.

With BitVC and OKCoin you can hold simultaneous long and short positions on the same contract. What should it be trading at? But in the end, at expiration of the contract, the contract MUST settle at the price of spot. She has just opened a position worth 1 bitcoin that has 5x leverage, and so has Bob. Why would you sell into fiat when you are concerned about a possible price drop? As the spot market moves, the traded futures contract price also moves. She sees that only the January 9 contract has any orders.

BFE accounts as they only want to trade 1 contract. This is the result of the counterparty structure of futures. The exchange is not your counterparty, the contracts are created when new limit orders in the orderbook are filled. Futures contracts on the other hand have no holding fees associated. This is not quite true. Note: This guide will NOT teach you strategies for how to analyze price to figure out how to profit. At the expiration of the contract you are trading, all positions get closed out and settled. By Friday, however, this profit is available to be withdrawn and the positions are all rebalanced. If you are looking for specific exchange walkthroughs, see the menu on the left to for BitMEX, CryptoFacilities, Bitfinex, and WhaleClub.

This means by definition there are as many longs as shorts in the bitcoin futures markets. This is the most important characteristic of ANY product for a trader. TradingView allows you to chart Bitcoin and analyse the trends in different time frames, and Investopedia has useful reference information. BitMEX offers a sandbox using Testnet coins. This requires a premium on the futures exchange to be able to hedge that trade. Additionally, unlike trading margin on Kraken or Bitfinex, you do NOT have to pay interest on the leverage you have!

It is a technical guide of how to trade bitcoin futures and understand what you are trading. This means that the PNL is smoothed in USD terms, so that the contract value is maintained through price fluctuations. Well, it depends on what your goals are. Date and Time does the contract expire and settle on the Index price? You are scared that price is going to drop. Futures are traded between customers using the orderbook, the exchanges are merely facilitating the trades, not taking the other sides of positions.

So a general principle you should follow is to AVOID MARKET ORDERS WHEN YOU CAN! BTC down to trade 1BTC worth of contracts, this is 5x leverage. Assume it is January 3, 2015. But think for a moment how important this tool is: earn more bitcoin when the bitcoin price drops, and you effectively do NOT have to sell to fiat anymore. On other exchanges you will at this point be liquidated out of your position. Spot has lower leverage which means you have to risk more of your capital with exchanges.

This means simply that you put down 1 bitcoin and you can trade 20 on OKCoin, or 100 bitcoin on BitMEX. Futures in general are counterparty contracts. She could put a limit order in the orderbook if she wanted. How Does That work? Just focus on the price of the contract and whether you are LONG or SHORT. Inverse bitcoin contracts are usually denominated in USD terms. Short Same Time on Same Contract? Remember that each futures exchange is different and make sure to visit the Exchange Walkthroughs to understand the exact nuances of how the contracts are priced. BFE and looks at the contract selections.

Assume there is 0 contracts open and 2 traders, and a new futures contract expiring in 7 days opens. Some exchanges like CryptoFacilities will merely notify you that you have to deposit more or reduce your positions to increase your margin. The Bitcoin Forum at bitcoin. This is one of the most powerful parts of futures: higher leverage means higher returns on your trades. The only differences between the exchanges is how they trigger liquidations and the procedure for handling margin calls. The contracts do expire and guarantee that they close at a future price, and this characteristic makes for the useful risk management tools available. The same goes for CFD sites like WhaleClub or 1Broker. So be aware of the premium or discount that is on longer dated contracts, this can allow you some arbitrage opportunities if you are patient and have the coins to apply to it. CryptoFacilities, Coinpit, and BitMEX has a realtime profit realisation, while OKCoin and Deribit has weekly rebalancing scheduled for all contract lengths.

Different exchanges use different anchors to settle against. This is because when the price is falling, the USD value of the BTC is also falling, so the payout mathematically adjusts for this and increases as the price falls, compensating for the reduced USD value. If you are new use Fixed Margin. However, you need not use Futures only to speculate, hedging on lower leverage is also a great use case for Bitcoin derivatives if you just want to defend your coins. Since bitcoin futures do tend to trade at a premium, you are in a way paying an implied interest rate in the contract, because if you want to go long, you have to pay above spot, so you pay the interest up front in the contract, in a way. We are in compliance with FTC regulations.

Trading these futures instead of actual bitcoins is smart because you are able to access higher leverage by entering contracts with counterparties, while keeping your coins safe in cold storage or elsewhere. We have a complete table of contents below that you can use to navigate the rich content available to help you learn the ins and outs of trading bitcoin futures. Some of the early sections may be a little too not difficult for those of you who already are traders, so just navigate through to the part that is most relevant to you if you want to hit a more advanced topic in the guide. If someone market buys that limit order, an open contract is created between you and the other trader. Futures price is not always equal to spot price. This commission comes at no charge to you and in many cases you get special deals or discounts from our links. To illustrate the point, recall that futures markets are just counterparty contracts. BTC value depending on the current price in the market. With bitcoin futures, you are able to trade margin without expending interest, because counterparties to the contract pay a fee to open and close the contract, and the exchange just manages the risk, so no money is really being lent!

This is how CryptoFacilities and many other traditional exchanges divide up their risk management. Now there is an open interest in the futures contract created. This is because you would be able to lock in the sale of the 1 BTC that is being invested at a higher price. Disclosure: We are a professional and educational website for bitcoin servies that sometimes receives compensation from the companies whose products we review or discuss. This is how you can go from a position of 0 to a negative exposure just by selling a contract. The leverage feature is essential for hedgers and speculators trying to get the most out of their capital when managing risk. Since we are stuck with this unprofessional Chinese exchange being the dominant market player in futures, we have to focus on their use of the terminology, but BitMEX and CryptoFacilities have very impressive and professional setups that use well documented procedures. BitMEX will take over your position and execute it into the market, so that the person on the other side of the contract can have someone else who pays for the profit. Statements on this site do not represent the views or policies of anyone other than myself.

BitMEX and CryptoFacilities have a more professional and properly set up exchange that has a naming convention that makes sense and matches their settlement, while using weekly rebalancing to allow for profit takeouts of customers. To avoid manipulation, most of them use an index. Read our Privacy Policy and Terms of Service. This means that the contract value comes into existence when two people agreeing to enter into it. As an example: if you have Quarterlies contracts that you made profits on over the weekend, then this profit needs to be withheld because of the risk of socialised losses. The price of the futures contract can deviate from the underlying price of bitcoin on spot markets, which can vary based on sentiment. If you contact CryptoFacilities you can also get access to a demo platform to use. In this sense, the contracts are just like trading spot! Here you will learn more broad concepts regarding daytrading bitcoin and futures in general.

Every bitcoin futures contract has two counterparties which each take one leg of the trade. BTC value of the contract. Bitcoin to take meaningful directional positions. High risk, high reward, high potential for loss of money. Vast majority of bitcoin futures contracts are INVERSE, not Quanto. We know on the spot market that bitcoins are being bought and sold for fiat, but how the heck are bitcoins being used to trade bitcoin futures contracts? Fixed margin will isolate your margin to the individual position you have made in an instrument. This is greater than zero in order to compensate the contract holder who is forced out of position due to illiquidity. The simple act of two traders with no open interest, one making a limit order which then gets filled by the other, is what creates this position.

In the weekly example, if a contract is issued at April 14, 2017, it dies on April 21, 2017. First you need to learn what futures are and the absolute basics. The most important feature of futures is that you never have to sell bitcoin ever again. Under no circumstances does this information represent a recommendation to buy or sell securities. However, the price of the futures contract is dependent on others trading it. BTC and you can just sell for a profit. So what happens is that at settlement time of the contract, that unfilled liquidation loss of money to the system will be deducted from the profits of ALL traders before they are distributed. We do no endorse or promote products which we do not believe in. There you can find full screenshot and step by step explanations of the key features specific to each place.

Your profit or loss of money comes from the change in the price you pay. Basically, if you trade margin spot on a site like Kraken or Bitfinex, you will pay financing fees while you hold the position open. Bob or Ann can pass off their side of the future contract to someone else. Most bitcoin futures are inverse and denominated in USD. Note that sites sometimes use slightly different systems, and where it is relevant it will be noted in this guide. Deribit handle unfilled margin call liquidations.

Speculating and hedging bitcoin with futures has never been easier. When you are getting started making actual trades, in general you should focus on making LIMIT ORDERS which will get FILLED by other traders. They ultimately settle at price of the commodity in the future on a particular exchange, or an index that represents a basket of prices at different exchanges. The multiple refers to the initial margin you need to open the nominal position value. You simply set the margin aside as collateral, and if the position goes against you, the collateral will be used to exit your position into a liquidation, or margin call. Bitcoin, which makes it ideal for speculators and hedgers. If the exchange is liquid and rational, then the market price of the contract will change as the spot market moves.

So their weekly contract is settled every Friday, at which point the BiWeeklies and Quarterlies are rebalanced to allow any profit to be withdrawn even though the expiration settlement is a week or many weeks later. So you can typically trade contracts and get in and out of them with decent spreads and reasonable fees. You may as well just close the position instead. This does NOT mean that you receive instant money for selling the contract. Just like futures contracts, options are securities that are subject to binding agreements. The key difference between options and futures contracts is that options give you the right to buy or sell an underlying security or asset without being obligated to do so, as long as you follow the rules of the options contract.

Whereas a stock gives you equity and a bond makes you a debt holder, a futures contract is a legally binding agreement that sets the conditions for the delivery of commodities or financial instruments at a specific time in the future. Treasury bills, and lesser known commodities like propane. Options on the stock of IBM, for example, are directly influenced by the price of IBM stock. They provide the bases for prices at wholesale and eventually retail markets for commodities ranging from gasoline and lumber to key items in the food chain, such as cattle, pork, corn, and soybeans. Now virtually all financial and commodity markets are linked, with futures and cash markets functioning as a single entity on a daily basis. Futures contracts are available for more than just mainstream commodities.

Futures markets emerged and developed in fits and starts several hundred years ago as a mechanism through which merchants traded goods and services at some point in the future, based on their expectations for crops and harvest yields. How does futures trading work? Many traders gravitate toward spreads because they often are less risky, have more attractive margin requirements and can be more predictable than an outright futures position. End the mystery about candlestick patterns with explanations and examples of 10 popular formations. If you have experience trading stocks, this guide can help you take the next step on your trading path commodity futures. Do you take profits? Or, letting a winner turn into a loser?

Ideal for the trader just beginning to explore the futures markets. This guide clearly discusses the restrictions involved with adding futures to a retirement plan. After a short course in the who, what, when, where and why of technical analysis, this guide starts at the beginning with trendlines, then moves on to recognizing chart patterns that can indicate either a continuation or change in the trend. Culled from years even decades of experience from both traders and brokers, these tips are the best of the best in helping you stay on the straight and narrow with your trading. RJO Futures, which has specialized in service futures traders for 100 years. It also provides an outline of the benefits this asset class can provide, such as diversification. Save yourself some trouble. This guide gathers these best practices into a single, usable reference.

RJO Futures brokers with any questions you might have. How about letting emotions trump your plan? Get a good foundation to begin building your futures trading efforts with this introductory guide to the futures markets. Do you have a trading plan? We encourage you to download any and all of the following guides to profit the knowledge you need to become the best trader you can be. Ideal for traders of any level of experience. Ideal for any trader taking the first step toward trading options on futures. This guide explains the basics of trading spreads.

Finally, learn about market sentiment and momentum and how to apply any of several popular market studies, including Bollinger Bands, MACD and RSI. Start with your market outlook. Ideal for all traders. Ideal for traders who like to minimize risk and appreciate the slow and steady approach. Take a page out of the playbook of many pension funds and learn why adding exposure to the futures markets in your retirement plan could work for you. Finally, review a few guidelines to help you decide whether that is even sensible, based on your goals. Learn how trading strategies are an integral part of risk management, including use of support and resistance levels. Learn about all these tips and more in this complimentary guide. This guide provides solid information and advice for any trader from novice to old pro.

Who uses futures and why? Keep this handy resource close by to understand both options terminology including strike price, intrinsic value and time value and how to read an options quote in a trading platform. Do you know the best way to place an order? You can count on RJO Futures to supply you with information you need about the markets, trading strategies and trading best practices all based on our decades of focusing on serving the futures trading community. Experienced traders know that managing risk is one of the most important factors in becoming a successful futures trader. On a quiet day market professionals will start to move their prices just to create a little action. The futures exchanges we see around us today are those whose appetite for risk has most accurately trodden the fine line between aggressive risk taking and occasional appropriate caution. Then they will only have to settle their gains and losses. So the level of credit extended in a futures market will tend to the maximum which has been safe in the recent past, and any exchange which set itself up more cautiously will have already withered and died.

Gold is bought as the ultimate defensive investment. These rollovers are expensive. Margin is the downpayment usually lodged with an independent central clearer which protects the other party from your temptation to walk away. Futures markets have structural features which are not natural in markets. In a standardized contract the exchange itself decides the settlement date, the contract amount, the delivery conditions etc. There is an acute psychological pressure involved in owning gold futures for a long time.

Your broker will require you to sign a detailed document explaining that you accept the significant risks of futures trading. You can make up the size of your overall investment buy buying several of these standard contracts. On a successful financial futures exchange those running the contract to settlement will be a small minority. Now you can see how futures provide leverage, sometimes known as gearing. The spot gold price is the gold price for immediate settlement. Some futures brokers refuse to run customer positions to settlement. Brokers in general would prefer to stop loss of money than to be open on risk for a margin call for 24 hours. The investor should understand that there are problems when a market loses its transparency.

This is not to say anyone is doing it, but it would probably be the first time in history that such a conflict of interest did not attract a couple of unscrupulous individuals somewhere within the industry. The futures markets tend to expel people at the time of maximum personal disadvantage. Margin is required because delaying settlement makes the seller nervous that if the gold price falls the buyer will walk away from the deal which has been struck, while at the same time the buyer is nervous that if the gold price rises the seller will similarly walk away. Having taken the relatively difficult step of taking a position in gold futures investors are required to make repeated decisions to spend money. Note that gold futures are dated instruments which cease trading before their declared settlement date. At the time trading stops most private traders will have sold their longs or bought back their shorts. In normal markets a falling price encourages buyers who pressure the price up, and a rising price encourages sellers who pressure the price down. Succeeding in the futures market is not not difficult. There are many speculators involved in the commodities market and any rapid movement in the gold price is likely to be reflecting financial carnage somewhere else.

In less benign times it can lead to structural failure. If it works well he can simulate volatility on an otherwise dull day, and panic the stop losses out of the market on both sides, netting a tidy profit for himself. Many individuals who have tried their luck in this market have been surprised at the speed at which their money has gone. In this way they can trade in much larger amounts, and take bigger risks for bigger rewards, than they would be able to if they had to settle their trades as soon as dealt. You can see why futures are dangerous for people who get carried away with their own certainties. The forced selling which these encouraged as markets started to fall was at the heart of the subsequent financial disaster. To be successful you need strong nerves and sound judgement. What it means is that a futures trade is always in a steady uphill struggle to profit.

The futures broker will be a member of a futures exchange. Investors should recognise that futures are at their best for market professionals and short term speculations in anticipation of big moves, which diminsh the effects of contango and rollover costs. To deal gold futures you need to find yourself a futures broker. There is no guarantee that the next management step will not be just a bit too brave. It also avoids being steadily stripped by stop loss of money executions. The theory of a stop loss of money seems reasonable, but the practice can be painful. Note: If dollar interest rates drop below the gold lease rates the futures price will be below the spot price.

This does not happen to bullion owners. Both the clearer and the exchange could theoretically find themselves unable to collect vital margin on open positions of all kinds of commodities, so a gold investor might make enormous book profits which could not be paid as busted participants defaulted in such numbers that individual clearers and even the exchange itself were unable to make good the losses. Many people buying gold hope to make large profits from a global economic shock which might be disastrous to many other people. That is not usually possible with an OTC future. The trader marks his price rapidly lower, for no good reason. Their intention is to sell anything they have bought, or to buy back anything they have sold, before reaching the settlement day. Secondly there will be a central clearer who will guarantee the trade against default. Each quarter a futures investor receives an inevitable call from the broker who offers to roll the customer into the new futures period for a special reduced rate.

It is the reference price for gold all over the world. This is where you pay the financing cost on the whole size of your deal. It was virtually the same phenomenon which was paralleled in 1929 by brokers loans. In other words a rapidly falling market can force selling, which further depresses the price, while a rapidly rising price forces buying which further raises the price, and either scenario has the potential to produce a runaway spiral. Investors can prevent being stopped out by resisting the temptation to have too big a position just because the futures market lets them. My future purchase of gold for dollars delays me having to pay a known quantity of dollars for a known quantity of gold. The differential closely tracks the cost of financing the equivalent purchase in the spot market.

This is relatively stable. They lose even when they are right in the medium term, because futures are fatal to your wealth on an unpredicted and temporary price blip. In benign times this structure merely encourages volatility. As a buyer you cannot get out of paying margin calls in a falling market until you sell, which is why buying futures sometimes costs people very much more than they originally invested. The problem is that just as trading in this way can prevent a big loss of money it can also make the investor susceptible to large numbers of smaller and unnecessary losses which are even more damaging in the long term. Beware of this imbalance. The large majority of people who trade futures lose their money. Many futures broking firms offer investors a stop loss of money facility.

The majority will be speculators looking to profit from price moves, without any expectation of getting involved on bullion settlements. Unfortunately every quarter lots of investors will fail the psychological examination and close their position. The big players can apply pressure at the close of a futures contract, and the small private player can do little about it. The idea is to attempt to limit the damage of a trading position which is going bad. Many will not return. If you have bought and the gold price starts falling you will be obliged to pay more margin. The derivatives market is one of the largest, and most important financial markets in the world. Today we are witnessing the unprecedented reform and reshaping of this.