Many newcomers get excited when they hear about contract trading, thinking it can lead to quick wealth, but often they are 'educated' by the market due to a lack of understanding of the rules and risk control. Today, I will help you understand what contract trading is, how to play it, and how to avoid liquidation in the most straightforward way.
1. What exactly is contract trading?
The biggest difference between contract trading and spot trading is: you don't need to actually hold the coins. You just need to determine the direction of the price fluctuations; if you do it right, you can make money, and if you do it wrong, you will lose money.
Think the price will rise? Go long.
Think the price will fall? Go short.
Therefore, the core of contract trading is not about buying and holding coins, but about 'betting' on market price fluctuations.
Two mainstream types of contracts
Perpetual contract
Features: No expiration date, can be held indefinitely. Prices are anchored to spot prices through a 'funding rate' mechanism. Long and short parties maintain the contract by paying each other funding rates.
Suitable for: Investors who want to hold positions for a long time or engage in some medium and short-term operations.
Contract agreement
Features: Has a fixed expiration date, settled at spot price upon expiration (or through physical delivery). Common types include current and next season contracts.
Suitable for: Investors who prefer to complete transactions before a specific date.
Three key concepts of contract trading
Contract quantity: The minimum trading unit of the contract, with different values for each currency.
Leverage: Leverage can amplify gains but can also amplify losses. For example, 10x leverage means a 10% drop in price could lead to immediate liquidation of your account.
Opening position: Buy to go long (bullish), sell to go short (bearish).
Closing position: End trading and lock in profits and losses. You can choose to close at market price or limit price.
Forced liquidation: When your margin is insufficient, the trading platform will automatically close your position to prevent losses from exceeding your account balance.
Four, risk control is the lifesaver for beginners
Contract trading can quickly earn money, but it can also quickly lose it all. To avoid being 'educated' by the market, risk control is key. The following points are rules that beginners must master:
Leverage controlled within 5 times
The larger the leverage, the higher the risk. 10x leverage means a 10% drop in price will lead to liquidation, while 5x leverage requires a 20% drop to be liquidated. Therefore, it is recommended to set leverage below 5x when starting out.
Single stop loss not exceeding 3% of the principal
For example, if you have a principal of 100,000, your loss per trade cannot exceed 3,000 yuan. This way, even if you incur several consecutive losses, you can maintain most of your principal and continue trading.
Prioritize mainstream coins (like BTC/ETH)
The market manipulation cost for mainstream coins (Bitcoin, Ethereum) is relatively high, volatility is relatively stable, and the risk is lower. On the other hand, some smaller coins may have high volatility and seem exciting, but in most cases, the volatility is artificially manipulated, making it easy for beginners to get 'liquidated'.
Try to trade during the day (9 AM to 6 PM)
Many beginners trade during the high volatility period at 3 AM, but this time does not have much market logic and is prone to mistakes. Try to avoid this time and choose day trading, which has lower risk.
Five rules for success in contract trading
Contract trading can indeed help you make money quickly, but if you want to profit in the long term, the real key lies in—Direction + Discipline + Risk Control.
First learn not to lose, then think about making money.
Don't think about getting rich through contract trading right from the start. First, learn how to avoid losses and ensure that every trade has reasonable risk control. Practice with a simulated account to familiarize yourself with the rules, and once you have some experience, start using a small amount of capital for live trading.
Stay calm and avoid a gambler's mentality.
Contract trading is essentially a probabilistic game, and you must not hold the mindset of 'I must make it back today.' Always remain rational and execute according to the established rules.
Summary
Contract trading can indeed bring quick profits, but the associated risks should not be ignored. To survive in the contract market long-term, you must achieve the following points:
Understand the basic concepts and operational rules of contracts;
Strictly control leverage and stop losses to avoid liquidation;
Choose the currency and trading time that suit you;
Most importantly, learn patience and discipline, and do not let market fluctuations interfere with your decision-making.
Approach contract trading with a calm and rational mindset, gradually accumulating experience; this is the way to go further.
