Close

5 Things that Novice Traders Need to Know When They Trade Crypto Derivatives

Crypto derivatives can be daunting to newcomers. It is imperative that novice traders be guided into the margin trading market by giving them the educational resources they need to execute a fully prepared trade. Spot trading is noticeably different from margin trading and the distinctions are best learnt by actively trading in the market, and the initial step into derivatives trading must be guided.

The potential of the derivatives market is too good to be ignored. There is a lot to be gained from trading derivatives, but it requires sound judgement, patience, and an iron stomach to be successful.

Here, I’ve listed some of the most basic ideas about crypto derivatives — the things that novice traders need to know before they begin dealing in the derivatives market. These are fundamental concepts that are vital and must come second nature to the user.

Keep these points in mind as you learn about derivatives trading. Remember to take advantage of the educational programs that many derivatives platforms offer — these will often cover the nitty-gritty of trading on margin

So without further ado, let’s begin.

1. Derivatives Trading is Risky, but it’s used for Risk Management

Right, this is obvious, isn’t it?

Derivatives trading is risky. You are betting large sums of capital, which can be instantly struck down by a large momentum in the wrong direction.

There are a few things to take into account here. Primarily, your risk appetite. This is the same as trading anywhere else. For derivatives, you’re going to start as small as reasonably possible. This will help you gauge how the market works under different scenarios.

The old adage of never investing more than you can lose holds true here as it does anywhere.

That said, no one invests small amounts in derivatives and makes any decent profit. It’s the balance of knowing how much to buy over what period, propped up by extensive research and market analysis.

Experienced investors will use their portfolio to hedge against risks. You may notice that the price of an asset is going up or down — so you hedge in the opposite direction with a buy or sell contract. This is not a beginner task, but it’s something you must look into.

2. Derivatives Influence the Spot Market

We’ve discussed this matter at Overbit many times before, and it’s something that I personally vocalise a lot.

Bitcoin and other cryptocurrencies are still extremely volatile, even if the volatility has reduced (https://www.buybitcoinworldwide.com/volatility-index/) in recent years. Compared to other asset classes anyway, there is a lot of price movement in a short period of time.

While this has put some people off of investing, you should note that derivatives will slowly balance out the price movements and bring some stability to the market. Understanding this, and knowing that the spot market tends to follow the derivative market, you can calculate trades on the spot market as well.

This is an important piece of information to have and one that the best traders use to their fullest advantage

3. There are Demo Accounts that You can Test Trading On

Some derivatives trading platforms offer demo accounts for you to practice your trading skills on. This is also available for other markets, but since you’re here for the crypto, let’s focus on that.

These demo accounts give you a bit of Bitcoin to play with. Use it wisely to learn how the system works, how leverages work, and generally how the market moves.

Think about your early days trading Bitcoin and Ethereum on the spot market and how far you came along. Think of the losses you made and how much better you would have done if you’d been a little more cautious.

Demo accounts serve as a practise ground that will help eliminate bad judgement and emotional impulses that lead to heavy losses

4. You Only Lose Money if You Are Reckless

One common behaviour that I’ve noticed among novice traders is that they tend to get too excited, perhaps taken away by greed or fear of loss.

No investment should be made without due consideration, and only the reckless find themselves making losses time after time. Traders who have been burnt tend to criticise the margin trading market as being the home of a select few, while the small traders are the ones who line the pockets of big traders.

That is just not true, as most losses are the result of one’s own misjudgement.

5. Stop-Losses Are Vital

And to help you avoid misjudgement and fall victim to your emotions, there are several automatic tools that can be leveraged. One of the most essential tools is the Stop Loss, which automatically sets sell or buy orders when a contract’s value reaches a certain point.

Suppose you’re worried that your trade is going to drop in value, and you might be liquidated. Putting a stop-loss at a comfortable point above the liquidation level prevents your capital from being lost. Sure, you might lose some money, but you’re not going to lose all of it. Likewise, this can be done when the price goes up.

Final Thoughts

These concepts should form the bedrock of your margin trading routine. They should be ingrained such that they become second nature. You shouldn’t have to think about it, and you should know why they are so important.

You will learn more, of course, by yourself, like I did when I first began. But that is the best part; it is a learning curve that requires dedication and intense focus, with great rewards at the end for those who take to it in good faith.

Elina is New York based writer and media consultant. Currently she is involved as an advisor in several ICOs. In addition to her professional interests, she loves jazz, modern art, coffee, and yoga.

scroll to top