Futures Trading: A Guide to Balancing High Risk and High Reward

Understanding the Futures Market from Scratch

Futures trading is a complex yet powerful financial tool. Unlike spot trading, it allows investors to leverage and short-sell to achieve greater returns. However, this enhanced profit mechanism also amplifies risks. Before diving into trading, understanding your risk tolerance is crucial—this is the first step to safely entering the futures world.

This guide provides novice investors with a detailed explanation of core concepts, trading mechanisms, risks, and opportunities in futures trading. Whether you’re a beginner unfamiliar with leverage or a trader seeking to systematize your knowledge, this material will help you build a comprehensive understanding.

What Exactly Is Futures Trading

Simply put, a futures contract is a derivative that allows investors to control a larger position with less capital. Unlike the spot market, futures enable profit in any price direction—whether the asset rises or falls.

For example, with Bitcoin: if you have 10,000 USDT but are bullish on BTC, you can borrow 90,000 USDT to buy a total of 100,000 USDT worth of Bitcoin futures contracts. If BTC’s price rises from $50,000 to $60,000, your 100,000 USDT position becomes worth 120,000 USDT. After repaying the loan, your net profit is 20,000 USDT—that’s the power of leverage. Leading exchanges offer leverage up to 125x, meaning potential gains can be magnified 125 times.

The Two Main Types of Futures

USDT-M/USDC-M Futures (Linear Futures)

These futures are settled in stablecoins (like USDT or USDC), with face value expressed in fiat currency. For example, BTCUSDT or ETHUSDC. The contract’s underlying asset is digital, but profits are settled in stablecoins. This design is more beginner-friendly because calculations are straightforward—price changes directly translate to fiat gains or losses.

Coin-M Futures (Inverse Futures)

Inverse futures are settled in the underlying cryptocurrency, such as BTCUSD or ETHUSD. The face value is in crypto, suitable for experienced traders. These are further divided into:

• Perpetual Contracts: No expiration date, can be held indefinitely
• Delivery Contracts: Set with a specific expiration date, automatically settled at expiry

Beginners should clearly distinguish these types. Although the terminology may seem complex, the core logic is simple: remember the underlying asset, settlement currency, and whether there is an expiration date to understand any futures contract.

How Futures Trading Works

The essence of futures is simple: exchanges provide loans to traders, magnifying their trading size, which also amplifies potential profits and losses.

Here’s an example: Trader A has 10,000 USDT, believes Bitcoin will rise. They borrow 90,000 USDT from the exchange, using a total of 100,000 USDT to buy two BTC futures contracts (assuming BTC is $50,000).

The next day, BTC rises to $60,000. Trader A can close the position, gaining 120,000 USDT. After repaying the 90,000 USDT loan, they have 30,000 USDT, and after subtracting the initial 10,000 USDT, their net profit is 20,000 USDT.

Key variables in this process include:

1. Leverage ratio can be freely adjusted based on risk appetite
2. Going long or short is equally simple—shorting can also be profitable
3. After profit, traders can choose to hold, add positions, close, or partially close
4. If prices move against the position, traders need to add margin to avoid forced liquidation

Key Concepts in Futures

Before trading deeply, understand these important terms:

Margin and Leverage: The initial margin is the funds needed to open a position; maintenance margin is the minimum funds required to keep the position open. If the account balance falls below the maintenance margin, a forced liquidation occurs.

Risk Rate: An indicator of the current position’s risk level. When the risk rate reaches 100%, the system automatically liquidates. Risk Rate = Maintenance Margin ÷ (Available Account Balance - Frozen Funds - Unrealized Losses)

Isolated Margin vs. Cross Margin: Isolated margin allocates independent funds to each position; losses in one do not affect others. Cross margin uses all available account funds collectively to support all positions.

Mark Price and Liquidation Price: Mark price combines spot index and funding rate, better representing the true value of futures than the spot price. Liquidation price is the level at which forced liquidation occurs.

Unrealized PnL: Theoretical profit or loss based on current market prices, excluding trading fees and funding costs.

Advantages of Futures Trading

Small Capital, Big Gains

The core appeal of futures is capital efficiency. With 10,000 USDT and 10x leverage, you can control a 100,000 USDT position. A 10% increase yields only 1,000 USDT profit in spot trading, but futures can generate 10,000 USDT. Leverage up to 125x can multiply potential gains exponentially.

Note that high leverage, while increasing upside, also significantly raises liquidation risk and is not suitable for beginners lacking risk management experience.

Shorter Trading Cycles

Futures trading is much faster than spot. Growing 10,000 USDT to 20,000 USDT in spot may require seven consecutive 10% gains. In futures, a single 10% move with 10x leverage can double your position (1,000 × 10 × 10% = 1,000 profit).

Profit in Down Markets

Crypto markets often see more prolonged bear phases. Shorting allows traders to profit even during declines, which is especially valuable for holders.

Hedging Tool

Experienced traders use futures for hedging. If you hold a large amount of spot assets but worry about short-term declines, you can open short futures positions. When spot prices fall, gains from short futures can offset some losses.

Risks in Futures Trading

Liquidation Risk Is the Biggest Killer

The most severe risk in futures is forced liquidation. When account equity drops below the maintenance margin, the system automatically closes the position. For example, with 50x leverage on BTC, a 2% decline (50 × 2% = 100%) can wipe out the position. Even if prices rebound in 5 minutes, the loss is locked in.

The same applies to short positions: a 20x leverage short position will be liquidated with a 5% rise.

Many beginners underestimate leverage’s true impact, not realizing potential losses can be as large as potential gains.

Other Major Risks

• Funding Rate Costs: Perpetual futures charge funding fees periodically, accumulating costs over time
• Slippage Risk: During high volatility, execution prices may deviate from expected
• Liquidity Risk: In extreme markets, it may be difficult to close positions promptly
• Psychological Risk: High leverage can trigger emotional trading, leading to larger losses

Complete Futures Terminology

Insurance Fund: A risk buffer maintained by the platform to absorb extreme liquidation gaps.

Maintenance Margin: The minimum margin required to sustain a position, fluctuating with position size.

Maintenance Margin Rate: The percentage of margin relative to position size. Falling below this triggers liquidation.

Margin Rate: An indicator of position safety; reaching 100% results in full liquidation.

Isolated Margin: Fixed funds allocated to a single position; risk is isolated, and manual adjustment is possible.

Cross Margin: All available account funds support all positions collectively, increasing capital efficiency but also risk.

Mark Price: A weighted price combining spot index and funding rate, more accurately reflecting futures value.

Liquidation Price Difference: The gap between the liquidation price and mark price, helping traders assess immediate liquidation risk.

Position Margin: Initial margin plus trading fees required for closing the position.

Initial Margin: The minimum funds needed to open a position.

Forced Liquidation: Automatic closing when account equity falls below maintenance margin.

Market Price Close: A stop-loss order executed at the best available market price.

Market Order: An order executed immediately at the best available price.

Smart Order: The system automatically places orders based on the highest probability prices; if not fully filled, it continues to place orders at optimal prices.

Trading Rewards: Reward tokens usable within certain trading volume ranges, but non-withdrawable or transferable.

Limit Order: An order placed at a specified price in the order book, only executed if the market reaches or exceeds that price.

Trailing Take Profit and Stop Loss: Dynamic orders that automatically trigger when the market moves favorably or unfavorably.

This guide covers the core knowledge system of futures trading. Mastering these concepts will enable you to evaluate market opportunities and risks more rationally and develop suitable trading strategies.