Bull or bear? Professionals don't care! Listed here are three methods each dealer ought to know
Those new to investing may think that professional traders spend most of their time staring at screens day and night analyzing the markets and selecting the best trades, but this couldn't be further from the truth be.
Having a good eye isn't what distinguishes top traders from average traders, but rather using proven strategies that enable pro traders to remain net positive over long periods of time. Today we're going to discuss how the futures leverage trading, funding rate, and the use of trailing stops by top traders.
Each of these simple strategies don't involve trading bots of their own or a significant margin deposit, meaning an investor doesn't need a massive trading balance to make profits.
The crypto markets are known for their whip price development, with many assets rising or falling by double to triple digits within 1 to 24 hours.
Investors are drawn to the opportunity to generate outstanding returns. Hence, it might sound crazy to propose a monthly profit of only 2% for cryptocurrencies.
Why should an investor choose such a low interest rate strategy? The answer is compound interest. If a trader can get 2% per month, their annual profit is 27%.
Few traders could consistently achieve this return by trying to guess the top and bottom of the market. More reliable profits relieve one of the stress of potential losses and the almost impossible task of timing the market.
A great strategy called a carry trade is to buy a cryptocurrency in traditional markets and sell its calendar futures with fixed months.
This rate can be measured by analyzing the base indicator, a metric also known as the annualized premium of the futures markets.
Basis of the ETH futures contracts. Source: Skew
This is not a permanent trade as the base indicator fluctuates depending on bullish investors. Usually there is a greater chance with altcoins as there is less competition for them.
In the graph above, notice how the base of Ether (ETH) hit the annualized level of 20% in mid-August. But there is a catch.
The devil always lies in the details, and this is one of those cases. This trade only works if the cryptocurrency stored as margin is the same one that is short-circuited via futures. With some futures exchanges, you can only deposit Bitcoin (BTC) or Tether (USDT) as security.
An important point that investors need to remember is that, unlike perpetual futures (inverse swaps), futures with a fixed calendar have a fixed expiration date. Therefore, the spot position must be sold at the time futures contracts are liquidated.
Trade with the financing rate
Other non-directional trades include option strategies, which typically involve multiple expiration and futures contracts.
An example that is less risky is exploiting and trading the financing rate. In the case of open-ended contracts (inverse swaps), either longs or shorts are calculated depending on the leverage imbalance. These exchanges usually inform you every 8 hours about a cost estimate for the next financing window.
When this price rises, professional traders will short sell futures contracts while buying on spot exchanges. Thus, your risk is completely hedged by charging the funding rate and immediately reversing trading.
Automated trading equals success
Sometimes there aren't many risk averse trading strategies in the market. In such situations, even professional traders might consider taking directional risk. What sets them apart from beginners is their use of automated trading.
Most traders know how to use stop loss, which is good, but that doesn't create a chance of winning. The same tool can be used to initiate trades, especially when using a trailing stop.
Binance Futures trading platform. Source: Binance
In the example above, this trailing stop buy (long) has an activation price of USD 12,900. While the market continues to trade above this level, this order remains dormant.
Once Bitcoin has reached this level, it will only be bought after a jump of 0.8% (recall rate). Hence, it will automatically buy once Bitcoin rises $ 103 from its lows.
This strategy is widely used by professional traders to automate their investment process and greatly reduces the need to check prices around the clock.
Practice and master these three strategies: futures carry trades, profit from the financing rate and buy with trailing stops. Focus on learning undirected trading and options strategies, and free yourself from guessing market tops and bottoms.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.