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High potential profits attract inexperienced traders to the Bitcoin futures and options markets. In addition to seeing influential traders make huge profits, most traders can’t help but be tempted by the prospect of getting to use up to 100x leverages across crypto derivatives exchanges.
Even while regular crypto derivatives contracts might help traders maximize profits, it just takes one slip-up for those plans to turn into a nightmare and a wiped-out bank account. Especially with crypto futures trading, it is more of an art form than a science, despite whatever chartists or technical experts may have you believe. Why? Because crypto trading- spot or derivatives- occurs in a highly speculative and unregulated market where prices can spike or plummet at any time due to factors such as a lack of liquidity, the actions of a few large investors known as “whales,” and the herd mentality fueled by social media. Millions of new traders enter this market every year, and considering how volatile cryptocurrency can be, it’s no surprise that many wind up empty-handed.
The fact that most novice traders in crypto futures lack significant experience does not help the problem. Due to ignorance, misinformation, fear, uncertainty, doubt (FUD), impulsivity, and impressionability, many people make fundamental mistakes and fall into dangerous traps while making financial choices.
In this post. We discuss three mistakes you should take care to avoid when you’re dealing in crypto futures.
What is crypto trading?
Starting at the very basics just in case you need reminding, the exchange of one cryptocurrency for another to make a profit is known as crypto trading. In the same way, traditional currencies have a forex market where they can be traded for other currencies; cryptocurrencies have digital currency exchanges that allow them to be bought and sold. Instead of closing for the day as the stock market does, the cryptocurrency market never sleeps.
A cryptocurrency trader must first choose a cryptocurrency exchange and a cryptocurrency wallet. To avoid losses in the unpredictable cryptocurrency market, newcomers should begin trading with well-recognized coins like Bitcoin or Ether.
How do cryptocurrency markets work?
The cryptocurrency market is decentralized because cryptocurrencies are neither issued nor guaranteed by a government or centralized institution. They use a distributed, automated system to pass hands. However, cryptocurrency exchanges and wallets allow for their purchase and sale.
Cryptocurrencies, in contrast to fiat currencies, do not exist outside a distributed digital ledger called a blockchain. A digital wallet stores crypto units when transferred from one user to another. Once the transaction has been authenticated and put into the blockchain, a process known as mining is deemed complete. Mining is essentially the act of blockchain nodes validating transactions and putting them into ‘blocks’ of data, which are then added to the chain.
Three Mistakes to avoid when trading crypto futures
Although the potential for loss is higher when investing in cryptocurrency futures, it is still possible to achieve a positive return. A crypto future, of course, is a contract where you agree to buy or sell the underlying units at a fixed date and time in the future, that too at a predetermined price.
Here are three mistakes to avoid when trading crypto futures:
1. Failure to establish a loss limit
A stop-loss order is the single most crucial feature of any crypto derivatives exchange. It’s an order to buy or sell cryptocurrencies underlying a crypto futures contract at a fixed price, meaning that if the market falls below that price, your transaction will be automatically completed, and you’ll get out of the position at the fixed price.
It’s like having protection in place for when things inevitably go wrong. If your position begins to sink and you cannot salvage it in time, you may limit your losses by selling at a lower price throughout the decline. Stop-loss orders are simple to set up; go into your account’s preferences and tell it at what point you want to sell off your holdings automatically.
2. Neglecting the differences between crypto futures and spot crypto trading
You must remember that crypto futures and other crypto derivatives are traded in a majorly different way than spot crypto trading. While many simply tend to use them as a way to bet on crypto prices without holding any of actual crypto themselves, crypto futures aren’t actually meant for that either.
You can use crypto futures as a hedging mechanism to protect your investments and holdings in crypto. Do remember to look out for the differences in pricings between the crypto derivatives and spot markets for the same amount of cryptocurrencies, and understand the risk factors associated with the leverage you’re using. The more leverage you use, the more at risk your funds are in case of an unexpected turn in the market.
3. Emotional trading and bias
Emotional states and prejudice may negatively impact decisions you make while crypto futures trading. It’s easy to make quick judgments when feeling emotional, and it’s easy to ignore new facts in favor of old habits and preconceptions when you’re biased to say, over rely on a particular piece of information or are conditioned to fear any kind of downtrend, so you make hasty decisions.
For example, there is something called the ‘action bias’, where we basically prefer to take immediate action instead of borrowing some time and thinking our actions through. This is because our brain perceives the act of taking a time out as being inactive. However, we often forget that the best course of action sometimes is to wait until you see an opportunity you’re prepared for.
Emotional crypto trading is a risky business for several reasons. Your instinct may tell you something is going up or down, but the market may disagree and go in the other direction. When this happens repeatedly, it might send traders toward poor decision-making.
Conclusion
These three blunders are fairly prevalent in crypto futures trading, and although they’re reasonably simple to spot, avoiding them may be challenging for newbie investors- especially when the stakes are so high. However, due to these very high stakes involved, every cryptocurrency trader must take a step back and consider their investment rationally and methodically to form a realistic, informed approach to what they assume will happen, and decide on an appropriate exit strategy.