The Essentials of Perpetual Futures Trading: What Every Investor Should Know

Consider a financial instrument that brings about flexibility in trading similar to the spot variety but with Perpetual futures' leverage without any constraints on an expiry date. That's basically what perpetual futures offer. High leverage and effective price discovery are the main advantages of perpetual future trading. Unlike traditional futures, perpetual futures never expire. This allows continuous and fluent trading opportunities. Below we will look at perpetual futures for the advanced investor looking to trade crypto and also a glimpse at how they are, how they work, and how to trade with them.

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What are Perpetual Futures Contracts?

Perpetual futures contracts are such financial derivative instruments that help traders speculate on the asset price without an expiry date. Perpetual futures contracts are also known as perpetual swaps or briefly, perpetual. Unlike the traditional futures contract, which has an expiry date, perpetual futures can be held indefinitely.

The case of perpetual futures contracts is particularly popular in the field of cryptocurrency trading of digital assets, including Ethereum or Bitcoin. They are also applied in the field of indices and commodities. These contracts are favored since they have high leverage and potentially give greater liquidity when compared to the spot market. 

Key points of perpetual futures trading:

Price Speculation: Similar to a regular futures contract, perpetual futures enable one to trade an opinion that the value of an asset will appreciate or depreciate.

No Expiration Date: Unlike conventional futures, whose settlement date had been predefined, perpetual futures never expire; traders can just hold their positions.

Funding Mechanism: A funding mechanism is deployed to maintain the price of a perpetual futures contract near the underlying asset's spot price utilizing periodic payments between the long-position holders. 

How are Perpetual Futures Trading and Perpetual Futures Contracts Interconnected?

Perpetual futures trading and perpetual futures contracts are closely interconnected. Here's the relationship:

A perpetual futures contract is a type of agreement in the financial world to facilitate trading between a trader and an exchange platform. It stipulates contact terms through which both the traders and the exchange platform can speculate on the prices of assets without having a set expiry date.

Perpetual futures trading is using these contracts to speculate on the price movements of an asset. The contact is the instrument through which trading actions are widely performed.

Perpetual Futures vs. Traditional Futures Contracts

Perpetual futures differ from conventional futures contracts in several ways. Perpetual futures have no expiration date, therefore they can be traded indefinitely. On the other hand, conventional futures have a predefined expiration date. In perpetual futures, there is usually some funding rate for holding a position. Conventional futures bear carrying or storage costs. Perpetual futures are normally used in cryptocurrency markets such as Bitcoin and Ethereum, whereas the traditional ones are mainly used in almost all financial sectors. On the other hand, perpetual futures allow very high leverage and quick trades, whereas traditional futures are widely held and, therefore, normally used for hedging and speculation of prices in the future.

Overview:

Perpetual futures are a rather modern financial instrument that tries to hold the market price very close to the spot price of the underlying crypto asset, mainly through a funding rate mechanism. Unlike traditional futures, perpetual futures do not involve rolling over contracts due to expiration which might be costly and a hassle. These represent traded contracts on cryptocurrency exchanges and they let traders leverage their positions for possibly enhanced returns. Of course, much like with any leveraged trading, this all comes with increased risks.

How Do Perpetual Futures Contracts Work?

Unlike traditional futures, perpetual futures are never settled, so you can keep a long or a short position for as long as you like, provided the maintenance margin is covered.
Here's how they work:

Initial Margin: In opening a position, you are covering only a fraction of it, known as the initial margin. The use of leverage allows more exposure with less capital.

Maintenance Margin: It is the minimum balance to be kept in your account to hold open positions. If the account goes below this threshold, it would give a margin call and hence liquidate some positions to recover losses.

Funding Rate: Another approach is employed to help keep prices closer to the underlying spot prices. Regarding market conditions, you may either pay or receive at periodic intervals.

Liquidation: If the market turns against your position and it fails to provide for the maintenance margin, your position could be automatically closed out by the trading platform at current market prices to avoid further losses.

Buyer vs. Seller: You are a buyer when you wager that the price will rise; this is a long position; and you are a seller when you predict the price to fall; this is a short position. The trading platform matches counterparties.

Due to the construction, perpetual swaps can be riskier than traditional futures because of market volatility and the leveraged positions involved.

Primary Characteristics of Perpetual Futures

No Expiration Date: Perpetual futures do not have an expiry date like other futures. One can hold a position for as long as one desires without the fear of the contract expiry. This feature shall let someone be in a position to speculate on the future price of an asset for as long as one wants.

Funding Rate Mechanism: It contributes to keeping the contract price in line with the underlying asset's current price. Depending on market conditions the result might be positive or negative at the time. This is used to reward or penalize those traders who have open positions, influencing the cash flow on the platform.

High Leverage: You have much less capital but a far stronger position in the market. Yes, this could mean enlarged gains; however, it also puts you at risk for larger losses. That should be balanced out with proper risk management.

Mark-to-Market Settlement: Your profits and losses would have to be settled daily or even hourly, with a continuing adjustment of your margin balance in real time. In case the market trend is against you and takes your capital below the maintenance margin, you might have a margin call to top up your balance.

Margin Requirements: Trading perpetual futures necessitates two kinds of margins: initial and maintenance. The initial margin is the amount required to open a position, whereas the maintenance margin is the minimal amount held in an account to avoid a margin call. These needs are vital in volatile markets for effective risk management.

How to Trade Perpetual Futures

It is critical to understand how perpetual futures operate and the risks associated. That said, a good trading plan in place that includes proper risk control measures, such as stop-loss orders and diversification in a portfolio, will help reduce the potential for losses.

Now, coming to the process of trading in perpetual futures, there are steps to be taken, which are mentioned below:

Open an Account: Create an account on any Bitcoin exchange or other site that provides perpetual futures contracts.

Fund Account: Deposit an amount to provide for initial and maintenance margins.

Select Contract: Choose which perpetual futures contract you want to trade.

Enter Position: Buy the contract to go long or sell it to go short, based on the view of the market.

Conclusion

Perpetual futures contracts have a few exciting opportunities for traders seeking to benefit from changes in the market and gain leverage over positions. Traders will be more confident about their ability to navigate perpetual futures markets toward the achievement of financial goals once they understand the benefits and risks, formulate a robust trading plan, and build some experience. Whether you want to develop customized perpetual futures trading solutions for your existing platform or build a completely new exchange, Osiz Technologies is the right partner and a leading Cryptocurrency Exchange Development Company. Our blockchain developers will be able to help you in coming up with a great Perpetual Futures Trading Platform.