1. Basic knowledge of cryptocurrency contract trading

1.1 Definition and Essence of Cryptocurrency Contracts

Cryptocurrency futures contracts are a type of financial derivative that allows traders to speculate or hedge risks on the future price movements of cryptocurrencies without actually owning them. Compared to traditional financial contracts, cryptocurrency futures contracts have some unique features and also have certain connections.

By definition, a cryptocurrency contract is an agreement between two parties on a specific trading platform to buy or sell a certain amount of cryptocurrency at a specific price in the future. It is based on blockchain technology and has characteristics such as decentralization, anonymity, and immutability. These features make cryptocurrency contracts more efficient and convenient in trading as they do not rely on traditional financial intermediaries.

1.2 Common Types of Cryptocurrency Contracts Analysis

1.2.1 Perpetual Contract

Perpetual contract is a type of cryptocurrency contract without an expiration date, providing investors with a more flexible way of trading. The characteristics of perpetual contracts are mainly reflected in the following aspects: it does not have a fixed expiration date, which means investors can hold the contract indefinitely according to their own trading strategies and market conditions, without worrying about the need for delivery or extension when the contract expires. This flexibility enables investors to better grasp market trends and make long-term investment layouts.

Perpetual contract's price is anchored to the spot market price and achieved through the funding rate mechanism. When the perpetual contract price is higher than the spot price, long holders need to pay funding fees to short holders; conversely, short holders need to pay funding fees to long holders. This mechanism ensures a close connection between the perpetual contract price and the spot price, avoiding significant deviations in price.

Perpetual contracts have many advantages. Their flexibility allows investors to better adapt to market changes and trade based on their own judgment and strategies, without being limited by contract expiration dates. The trading costs of perpetual contracts are relatively low, usually without delivery fees, and funding rates are also low when the market is relatively stable. This allows investors to reduce trading costs and increase investment returns when trading frequently. The high leverage feature of perpetual contracts provides investors with opportunities to achieve significant gains with a small investment when market conditions are favorable. Of course, while enjoying these advantages, investors also need to fully understand the risks of perpetual contracts and manage positions and risks properly.

2.2.2 Delivery Contract

A futures contract is a cryptocurrency contract with a specified expiration date, and at expiration, the contract will be settled according to the agreed price and method.

The risk characteristics of delivery contracts are mainly reflected in the following aspects. Due to the definite expiration date of the delivery contract, investors need to handle the contract before the expiration, otherwise they will face forced delivery. Before the expiration of the contract, the fluctuation of market prices may lead to a substantial change in the contract value. If investors make incorrect market trend judgments, they may face losses at the time of delivery. Especially in the case of extreme market conditions, price fluctuations may be very intense, leading to losses beyond the expected.

The leverage effect of futures contracts also amplifies the risk. Similar to perpetual contracts, futures contracts usually adopt a margin trading mode, where investors only need to deposit a certain proportion of margin to control a larger value of contract positions. If the market trend is contrary to the investor's expectations, the leverage effect will double the losses, potentially causing the investor's margin to be completely lost, or even owing funds to the trading platform.

In futures contract trading, investors need to closely monitor the contract's expiration date and make trading decisions in advance. If investors believe that the market trend is unfavorable to them, they can choose to close their positions before expiration to avoid delivery risks. Investors also need to control leverage ratios reasonably and choose appropriate margin ratios based on their risk tolerance and market conditions to reduce risks. At the same time, they should strengthen market analysis and research, improve their ability to judge market trends, and reduce losses caused by incorrect judgments.

Two, cryptocurrency contract trading strategy

2.1 Long-term investment strategy

2.1.1 Select Potential Cryptocurrencies
Bitcoin, as a pioneer of cryptocurrency, has an irreplaceable position. Its decentralized nature enables transactions without relying on third-party institutions, ensuring autonomy and privacy. The total amount of Bitcoin is strictly limited to 21 million, similar to the scarcity of gold, giving it natural value storage properties. Over time, the mining difficulty of Bitcoin has gradually increased, leading to rising acquisition costs, further supporting its value. Over the past decade, Bitcoin has undergone multiple market cycles, despite significant price fluctuations, it has shown a significant upward trend overall. Many investors consider Bitcoin as digital gold and have included it in their investment portfolios to preserve and increase assets.
2.1.2 Batch Positioning Techniques
Phased positioning is an effective strategy to reduce costs and risks in investment. Taking Bitcoin investment as an example, assuming the current price of Bitcoin is $50,000, the investor plans to invest $100,000. If a one-time positioning is adopted, the investor will invest all the funds to purchase 2 Bitcoins. However, if the market price subsequently drops to $40,000, the value of the investor's assets will shrink to $80,000, resulting in a loss of $20,000.

If the staged position-building strategy is adopted, investors can divide the $100,000 fund into 5 equal parts, each part being $20,000. When the price of Bitcoin is $50,000, invest $20,000 to purchase 0.4 Bitcoin. If the price falls to $45,000, invest another $20,000 to buy approximately 0.44 Bitcoin. In this way, as the price falls, continuously buying will gradually reduce the investor's average cost. When the price falls to $40,000, invest another $20,000 to buy 0.5 Bitcoin. At this point, the investor has invested a total of $60,000, holding approximately 1.34 Bitcoin, with an average cost of about $44,776. Compared with one-time position-building, the loss magnitude of staged position-building is smaller under the same market price decline.

The advantage of this strategy is that it avoids the huge risk caused by buying at a high position all at once. It is difficult to predict the market price trend accurately. By gradually accumulating chips through phased warehousing, investors can reduce the average cost, improve the safety and stability of investment. At the same time, phased warehousing also provides investors with more opportunities to observe the market and flexibly adjust investment plans according to market changes.
2.1.3 Follow Market Trends
Market hotspots often trigger sharp fluctuations in cryptocurrency prices in the short term, providing trading opportunities for investors. Taking the approval of the Bitcoin spot ETF in 2024 as an example, this news has attracted widespread attention and intense discussions in the market. The approval of the Bitcoin spot ETF means that funds from traditional financial markets can flow more conveniently into the Bitcoin market, which is seen by the market as a significant positive news. Before and after the announcement of the news, the price of Bitcoin experienced a substantial increase. If investors can pay attention to such hot events in advance, analyze their potential impact on the market, they can buy Bitcoin contracts before the price rises, thus gaining considerable profits in the short term.

3. Manage risks in contract trading effectively.

3.1 Confirm Risk Tolerance

Before trading in futures contracts, it is important to determine the proportion of a single loss to the total account funds. For example, if trading once a day, with the proportion of a single loss to total assets controlled at 10%, only 10 consecutive losing trades are needed to deplete the entire account. This is unacceptable for futures traders. However, if the proportion of a single loss to total account funds is controlled at 5%, 3%, or even 1%, the probability of depleting the principal will significantly decrease.

3.2 Strictly enforce the contract trading plan​

The following figure is a complete trading plan that includes various key points, which can be adjusted according to the cryptocurrency market conditions. The overall logical framework is applicable. Start with the macro cycle to determine the current stage of the market, then focus on technical analysis to find opportunities, and finally, the detailed operational plan for specific trading targets.

4. Position management in contract trading

4.1 Principles of Position Management to Follow

1. Never invest all your funds in the market. Especially in the beginner stage or in a state of consistently making small gains and big losses, investing all your funds in the market will not only amplify the losses but also affect the trader's mentality to some extent. Of course, short-term traders can attempt to take a large position with strict stop-loss and a reasonable risk-reward ratio.

2. You need to have a scientific strategy for adding and reducing positions. Although trading is a game of probability from a mathematical perspective, it is by no means a static model. The ever-changing market may present trends that require us to increase or decrease positions after we enter the market, at which point your win rate and risk-reward ratio are also changing. This requires your position management, including adding and reducing positions.

Position management should be based on individual opening and closing principles and psychological tolerance. Here we only provide one train of thought, and position management strategies need to be based on your own trading strategy. So, what factors need to be considered when setting position management strategies? The following are for reference:

1. Risk preference. You need to determine whether it is aggressive or conservative, how much loss you can accept each time, and how many stop-loss points these losses correspond to in the trading system.
2. Win rate of transactions. Position management must be determined in conjunction with the win rate of transactions, so as to ensure that your capital can withstand the loss under normal ratio of profit and loss times.
3. The risk-reward ratio of trading, also known as the profit and loss ratio. Win rate and profit and loss ratio are twin brothers. With the combination of win rate and profit and loss ratio, position management must be able to withstand the "worst period" in trading, otherwise, one may die tragically before the dawn of one's trading system in the dark night before dawn.

In short, position management is not an independent static part, it is an integral part of the entire trading system. The entry and exit strategies in the trading system complement each other with position management, and both are indispensable.

4.2 Common Position Management Strategies

4.2.1 Rectangular Position Management
The method sets a predetermined proportion of the total funds as the amount of funds to enter the position when opening a position. This fixed proportion is followed for each subsequent position increase. After multiple position increases, the shape becomes like a rectangle, hence the name 'Rectangular Position Management Method'.

• Advantages: Each additional position increases the overall cost basis and allows for shared risk. If the judgement is accurate, it can lead to substantial profits.
• Disadvantages: The holding cost increases rapidly, making it easy to fall into a passive situation, and the cost dilution rate becomes slower over time, making it more prone to becoming trapped.

4.2.2 Pyramid Position Management
The initial entry capital is relatively large, and if the market runs in the opposite direction, gradually reduce the position. If the market trend meets expectations, gradually increase the position, but the increase ratio becomes smaller and smaller, and the position control shows a form of large downward and small upward, so it is called pyramid position management.

4.2.3 Funnel Position Management
The initial entry capital is relatively small. If the market moves in the opposite direction, the future market gradually adds positions to dilute the cost, and the proportion of adding positions becomes larger and larger. This method of position control is in the form of small positions below and large positions above, so it is called funnel-shaped position management.

The advantage of the funnel shape is that the initial risk is relatively small. In the case of not being liquidated, the higher the funnel, the more substantial the profit. The disadvantage of this method is that it needs to be based on the consistent trend and judgment of the market. It requires high level of investors' ability to read the market and operational skills. If the direction is judged incorrectly or the trend of the direction cannot surpass the overall cost level, it will be trapped in the dilemma of not being able to profit and exit.

Three position management methods have their own strengths, simply put: rectangles are suitable for oscillating markets; pyramids are suitable for the early stages of a bull market, right-side trading; funnels are suitable for bottom fishing, left-side trading.

Conclusion

When novices participate in cryptocurrency contract trading, they must have a deep understanding of the basic knowledge of various contracts, clearly distinguish the characteristics and differences between perpetual contracts and delivery contracts, and make appropriate choices based on their own investment goals and risk preferences. At the trading strategy level, a long-term investment strategy requires precise selection of promising cryptocurrencies and skilled use of batch opening skills to reduce costs and risks; a short-term trading strategy requires clever use of technical indicators, close attention to market hotspots, and seizing fleeting trading opportunities.

Risk management is of paramount importance. It is necessary to comprehensively identify risk types such as market fluctuations, leverage, and forced liquidation, and take effective measures such as setting reasonable stop-loss and take-profit points, strict control of positions and leverage ratios to deal with them. Good trading psychology and emotional management are also indispensable. It is necessary to resolutely overcome common psychological misconceptions such as greed and fear, formulate and strictly implement trading plans, learn to accept losses calmly, and continuously cultivate a good trading mentality.

Disclaimer
This content is for reference only and does not constitute investment advice. Contract trading carries high risks and may lead to principal loss. Please participate cautiously according to your own risk tolerance. Trading is risky, and investment needs to be cautious.