Trading Crypto Utilizing derivatives contracts for leverage and hedging strategies can be highly effective, however, traders commonly fall prey to three major errors.
Novice traders are frequently enticed by the potential for substantial returns and are drawn to the futures and options markets. They are allured by the impressive gains touted by influencers and the many ads promoting 100x leverage from derivatives exchanges, which can be difficult to resist.
The use of recurring derivatives contracts can boost potential gains for traders. However, a few misjudgments can swiftly turn the promise of significant profits into a nightmare, resulting in depleted accounts. Furthermore, experienced investors in traditional markets are not immune to the challenges unique to the Trading Crypto market.
Similar to conventional markets, cryptocurrency derivatives operate by enabling buyers and sellers to engage in contracts tied to an underlying asset. However, these contracts are non-transferrable across different exchanges and cannot be withdrawn.
This article seeks to explore three typical mistakes that traders should avoid when dealing with futures and options.
YOUR ACCOUNT CAN BE RUINED BY CONVEXITY
The primary challenge that traders encounter when dealing with cryptocurrency derivatives is known as convexity, where the value of the margin deposit fluctuates with the underlying asset’s price movement. When the value of Bitcoin rises, the margin deposit of the investor also increases in U.S. dollar terms, enabling them to leverage further Trading Crypto .
However, when the opposite trend occurs, and the BTC price plunges, the deposited margin of the users decreases in U.S. dollar terms, leading to a reduction in their leverage. Traders frequently become over-enthusiastic while trading futures contracts and positive market trends can lower their leverage as the BTC price goes up.
The key takeaway is that traders should not expand their positions solely due to the boost in margin deposit value caused by the market’s upward trend.
THERE ARE PROS AND CONS TO USING AN ISOLATED MARGIN
In order to trade derivatives on an exchange, users are required to transfer funds from their regular spot wallets to futures markets, and some exchanges may offer an isolated margin option for perpetual and monthly contracts.
Traders can choose between cross collateral, where the same deposit serves multiple positions, or an isolated margin.
Both options have their advantages, but inexperienced traders often get confused and end up being liquidated due to mismanaging their margin deposits. An isolated margin, however, provides more flexibility in managing risk but requires additional steps to prevent excessive liquidations.
To address this issue, it is recommended to use cross margin and manually enter stop loss orders for every trade. This will help avoid confusion and ensure proper management of margin deposits Trading Crypto.
BE CAUTIOUS OF ILLIQUID OPTIONS
Making the mistake of trading illiquid options markets can drive up the cost of opening and closing positions, which is compounded by the inherent expenses that come with crypto’s high volatility Trading Crypto.
To avoid this pitfall, options traders should make sure that the open interest is at least 50 times the number of contracts they want to trade. Open interest refers to the number of outstanding contracts with a specific expiration date and strike price that have been bought or sold in the past.
Another key factor to consider is implied volatility, which can help traders make informed decisions about an option’s current price and how it might change in the future. It’s important to note that an option’s premium rises with higher implied volatility, making it best to avoid buying calls and puts with excessive volatility.
However, derivatives trading takes time to master, so traders should start small oduwacoin and test each function and market before placing significant bets.
