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Futures Trading Systems
Last updated on November 6th, 2020
Many traders I come across seem to start off by trying to day trade stocks or Forex and for many years this concept was pretty alien to me.
If you want to be an active day trader, futures are really the way to go. But to some, the world of futures trading is a dangerous business – a world where fast money and blown up accounts often go hand-in-hand.
The simple fact is that this is not an unusual reality in the industry. But there’s another reality for those who understand the risks involved and maintain appropriate safeguards: trading futures markets is one of the most efficient ways to use your capital.
LEVERAGE In The Futures Market
Leverage certainly has the potential to be a case of Dr. Jekyll and Mr. Hyde. I don’t think it’s too hard to find horror stories of traders being over-leveraged and blowing up their accounts. It’s not uncommon for a trader who has taken a few “bad beats” to go “on tilt”, trade erratically and double up (or perhaps worse) on their losing positions.
But even without this very real aspect of trading, many traders just don’t realise what the odds of them having a sustained period of draw down are and so they are less likely to fully appreciate the need to address how much capital they should risk over how much capital they can risk.
Let’s look at some figures to put into perspective just how much leverage you can get as a trader of futures.
The E-mini S&P 500 (ES) trading at a level of 1600 gives a trader control of $80,000 of product (index level x $50 per point for this product). Current CME exchange margin is $3,850 per contract which equates to a leverage of roughly 20:1.
Whilst that’s pretty high it’s not exceptionally so. Enter the brokers.
For day trading, brokers offer a much lower intraday margin rate. In theory a low intraday margin is useful for a well-capitalized account if you don’t want to leave all of your capital sitting in your account.
However, in practice many traders will use these low margins to trade with much less capital than is realistically required. Typically a broker will offer you $500 intraday margin and I’ve seen as low as $400 per contract for the ES.
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At the same 1600 level that’s a leverage of 200:1.
That’s 8 points to zero or a 0.5% move in a product that typically has a primary session range of 10-20 points. And it’s important to note that margined accounts can fall below zero, meaning that if the market moves sharply against you and losses are greater than the capital in your account, you will be liable for the difference.
But just like everything else in trading, it’s an individual’s responsibility to ensure that they fully comprehend the risks involved and act in their own best interests. If you take account of the risks, the ability to highly leverage your trading capital can be a powerful ally.
If you have a genuine edge in the market that has demonstrated will make money over time, then being able to trade more contracts than you would normally with the capital you have is a distinct advantage. If you stick to a 1-2% risk per trade with a 2-3 point stop in the ES, you only need $5,000-15,000 per contract for example.
Clearly there’s the opportunity to turn a relatively small amount of capital into a great return.
Futures Markets Have Great LIQUIDITY
In fairness, there are plenty of futures instruments that have poor liquidity just as anything else could that you might look to trade. But there are reasonably high numbers of really great products to trade, with a variety of different behavioral features and risk profiles that also have fantastic liquidity.
Many instruments don’t even have a bid-ask spread in the front month contract.
An important point is that futures contracts are agreements to deliver (or take delivery of) the underlying product at a certain date and therefore they expire. So if you hold a long (buy) position in Crude Oil into expiry, you will be expected to take delivery and pay for a whole load of barrels of Crude Oil.
Some products are cash settled instead like the ES for example. It’s for this very reason that a futures trader will never normally want to hold a position into expiry. The front month is the nearest expiring futures contract (except when approaching the expiration date) and this is where the liquidity for an instrument is normally found.
The main point about liquidity though, is that you’ll never really have a problem getting into or out of a position in the markets.
CENTRALIZED REGULATED EXCHANGES
The futures industry is highly regulated and whilst there are those who try to get away with nefarious activities, they are often identified swiftly and dealt with appropriately. Regulatory requirements are stringent and are there to protect traders.
And because the exchanges are centrally cleared, effectively meaning that all trades goes through the exchange (although this isn’t 100% accurate it is true for the most part), there is accountability for all trades that take place. Simply put, you get what you see in most cases when you trade. Direct market access means no funny business from your broker too. Your trading platform links into the exchange.
Because of this, the quality of futures markets is high.
The bottom line is that if you are a sensible, responsible trader who treats this as a business, futures markets offer a fantastic way to trade. They are efficient, cost effective and properly regulated. Sure, like any other product there are a few nuances to learn.
But if you’re serious about trading and day trading in particular, you should seriously consider trading futures.
Ethanol Futures Trading Basics
Commodity Trading Basics- Futures and Options 101
What are options?
Many people are intimidated by the unlimited risk potential when trading futures contracts. Margin calls can and do happen when trading futures or granting naked options. Long options have limited risk and many investors choose them to trade over commodities futures contracts for that reason. Your maximum risk when purchasing an option is loss of the premium paid plus your commission and fees. Therefore your account can’t go negative as can happen in a futures contract. An option gives the purchaser the right but not the obligation to buy or sell a futures contract, at a predetermined price (strike price) on or before a predetermined expiration date.
To go long (buy) an option requires a buyer (holder) to pay a premium. When going short an option, the seller (writer or grantor) receives a premium but is liable for the entire contract value. Therefore option grantors’ risks are similar to that of a futures contract trader. Click here to learn more about selling options on futures contracts.
What is a call option?
A call option gives the purchaser the right but not the obligation to buy an underlying futures contract. Purchasing a call means that you are expecting higher prices for the underlying commodity. Let’s assume you purchased a December Crude Oil $60 call option. You bought the right but not the obligation to buy 1,000 barrels of December crude oil for $60 per barrel.
What is a put option?
A put option gives the purchaser the right but not the obligation to sell an underlying futures contract. Purchasing a put means that you are expecting lower prices for the underlying commodity. Let’s assume that you purchased a November Soybean $5 put option. You bought the right but not the obligation to sell 5,000 bushels of November soybeans at $5 per bushel.
How is the value of an option figured out?
To understand option trading basics first you have to understand the meaning of intrinsic and extrinsic value. The option premium is made up of both of these values. Intrinsic is the value of the option if you exercised it to the futures contract and then offset it. For example if you have a Nov. $5 soybean call and the futures price for that contract is $5.20 hence there is a .20 intrinsic value for that option. Soybeans are a 5,000 bushel contract so 20 cents multiplied by 5,000= $1,000 intrinsic value for that option.
Now let’s say that same $5 Nov. soybean call costs $1,600 in premium. $1,000 of the cost is intrinsic value and the other $600 is extrinsic value. Extrinsic value is made up of time value, volatility premium and demand for that specific option. If the option has 60 days left until expiration it has more time value than it would with 45 days left. If the underlying futures contract has large price movements from low to high the volatility premium will be higher than a contract with small price movements. If many people are buying that exact strike price, that demand can artificially push up the premium as well.
What is time decay?
Options are by definition a wasting asset because each and every day the option’s premium is being eroded by time. This erosion of premium accelerates throughout the lifespan of the option. Time decay is the best friend of option sellers and the worst enemy of option purchasers. The value of out-of-the-money options is composed almost entirely of time value. The chart below depicts the acceleration of the time decay of an option with a 9 month lifespan from its inception to its expiration.
How much will an option premium move in relation to the underlying futures contract?
You can approximate the move by finding out the delta factor of your option. The delta factor tells you how much the change in premium should occur in your option based on the underlying future contract’s movement. Let’s say that you think Dec. gold will go up by $50/ounce or $5,000/contract over a short period of time. You bought an option with a .20 or 20% delta factor. This option should gain approximately $1,000 in premium value of the $5,000 expected gold futures price movement if it occurs in a timely manner.
Can an option speculator have a profit before the option has intrinsic value?
Yes, as long as the option premium increases enough to cover your transaction costs such as commission and fees. For example, you have a $3 Dec. corn call and Dec. corn is at $270/bushel and your transaction costs were $50. Let’s say your option has a 20% delta and the Dec. corn future market moves up 10 cents/bushel to $2.80/bushel. Corn is a 5000 bushel contact so 1 cent multiplied by 5,000= $50. Your option premium will increase by approximately 2 cents = $100. Your break even was $50 so you have a $50 profit without any intrinsic value because you are still out of the money by 20 cents.
Conversely, the underlying futures market for your options can move the direction that you anticipated but not quickly enough to offset the time decay of the options. So, options can lose money in spite of the underlying futures contract moving in a favorable direction.
What is a bull call spread?
A bull call spread is a bullish strategy to take advantage of markets with high volatility option premiums. It involves the purchase of a at or close to the money call option and the granting of a further out of the money call option. The profit potential is the difference between the strike prices minus your costs and your risks are the cost of the trade. Example: buy 1 Dec. crude oil $70 call for $2,500 and sell 1 Dec. crude oil $75 call for $1,000. The cost of the trade is $1,500 ($2,500-$1,000) and your profit potential is $3,500 ($70-$75=$5 and crude is 1000 barrel contract so $5 multiplied by 1000=$5,000-$1,500 cost=$3,500).
What is a bear put spread?
A bear put spread is just like the bull call spread above but it uses puts instead of calls and is for speculating on a decline in prices. So you would buy an at or near the money put and grant a further out of the money put. Learn More >>>
Futures Trading 101
Here is the introduction to futures guide from the CME Group.
What is a futures contract?
The unit of exchange that trades in the exchanges is the futures contract. Each contract provides for the future delivery of goods at a specified date, time, and place. Each particular commodity is bought and sold in standardized contractual units, which makes them completely interchangeable.
How old and how useful are the commodities markets?
The modern futures markets have been traded since rice futures traded in the eighteenth century in Osaka, Japan. However, historians have found some evidence of primitive futures contracts for olive oil, spices and other goods were used by shipping merchants in Persia before Christ. In the United States futures trading began in the mid-nineteenth century with corn contracts in Chicago and cotton contracts in New York.
The industrial revolution brought a new technology and the ability to produce more efficient tools and consequently more food. Economic output not only began to keep pace with the growing population but also increased the standards of living. This new productivity called for more agricultural storage, transportation, and more efficient distribution of goods.
At first the cash markets could handle the growing demand, but as quantities increased, the futures markets with uniform commodity pricing, grading, and delivery, became increasingly important. To cope with the gluts that occur during harvest times and with the shortages that occur before the harvest, purchasers could now protect themselves from price fluctuations by locking in a specific price for a commodity before they actually needed it. So futures and options became necessary for producers, consumers and investors.
Why do people invest in commodities?
Leverage is very important to the commodities markets. Unlike the stock market, where you might have to invest 10,000 dollars to leverage 10,000 dollars of a particular stock. A commodities trader can leverage tens of thousands of dollars worth of a commodity for pennies on the dollar. Also unlike stocks, commodities have intrinsic value and will not go bankrupt.
The futures markets are so crucial to the well being of our nation, that the government established the Commodity Futures Trading Commission (CFTC) to oversee the industry. There is also a self-regulatory body, the National Futures Association (NFA), who monitor the activities of all futures market professionals to ensure the integrity of the futures markets.
Commodities also give the investor the ability to participate in virtually all sectors of the world economy and have the potential to produce returns that tend to be independent of the stock, bond and real estate markets. In fact portfolios that add commodity investments can actually lower the overall portfolio risk by diversification.
What is the difference between hedging and speculating?
Just about every product that you consume would likely cost dramatically more without the commodities futures markets. Because of the intrinsic risks associated to being in business, lacking the ability to shift risk, a manufacturer/producer of goods or services would be forced to charge higher prices, and the consumer would have to pay higher prices. This shifting of risk to someone willing to accept it is called hedging. Manufacturers could effectively lock in a sales price by going short an equivalent amount of goods with futures contracts. If a mining company knew that they were going to sell 1000 ounces of gold in several months, they could protect themselves for a future price decline by going short 10 gold futures contracts or 10 gold put option contracts today. If the price of gold fell by $30 in the following months, they would receive that much less in the cash marketplace for their gold, but earn that much back when they offset their short gold futures or gold options positions. The futures price will eventually become the cash price. A user or buyer of goods can use the futures market in the same manner. They would need to protect themselves from a future price increase, and therefore go long futures contracts.
The person willingly accepting a risk does so because of the opportunity to profit from price movements, this is known as speculating. The cotton in your shirt, the orange juice, cereal and coffee you had for breakfast, the lumber, copper and mortgage for your home, the gas or ethanol that you put in your car all would be priced many times higher without the participation of speculators (you) in the futures markets. Through supply and demand market forces, equilibrium prices are reached in an orderly and equitable manner within the exchanges, and world economies, and you, benefit tremendously from futures trading.
What if I am not a large producer or consumer of a commodity and I just want to hedge my stock and bond portfolio?
The same thing applies to protecting your stock and bond portfolios from adverse market moves. If you have exposure in Dow Jones, S & P or NASDAQ stocks you can simply short the futures or buy puts on the index. If you are worried about higher interest rates hurting your fixed income investment prices, once again, you can short the futures or buy puts on your Treasury Bills, Notes and Bonds.
What does going long and going short mean?
To make a profit on any investment requires that something be bought and sold. When trading a futures contract it doesn’t matter if you initially sell or buy, as long as you do both before the contract comes due. If you were bearish you would sell, or go short. If you were bullish you would want to buy, or go long.
How do you sell something that you don’t own?
When trading futures, you never actually buy or sell anything tangible; you are just contracting to do so at a future date. You are merely taking a buying or selling position as a speculator, expecting to profit from rising or falling prices. You have no intention of making or taking delivery of the commodity you are trading, your only goal is to buy low and sell high or vice-versa. Before the contract expires you will need to relieve your contractual obligation to take or make delivery by offsetting your initial position. Therefore, if you originally entered a short position to exit you would buy, and if you had originally entered a long position, to exit you would sell.
How do trades take place?
Chicago Mercantile Exchange and most other U.S. futures exchanges offer two venues for trading: the traditional floor-trading venue and electronic trading. Broadly speaking, trading is essentially the same in either format: Customers submit orders that are executed – filled – by other traders who take equal but opposite positions, selling at prices at which other customers buy or buying at prices at which other customers sell. This matching of buyers and sellers occurs in both open outcry and electronic trading, but there are some differences between the two processes.
In open outcry trading, orders are communicated to brokers in a trading pit, via requests that customers make to their brokerages by phone or computer. Customer bids and offers are presented by pit brokers to other brokers standing in the pit, and trades are “executed” – matches are made – when prices that are mutually acceptable to buyers and sellers are identified. Customers are notified of their trades, information about each trade is sent to the clearing house and brokerages, and prices are disseminated immediately throughout the world. The trade order is also time-stamped at both ends of the process.
In electronic or screen-based trading, customers send buy or sell orders directly from their computers to an electronic marketplace offered by the exchange. There is no need to have brokers submit and execute orders for customers, because the customers will have received brokerage approval to trade electronically, and the exchange computer system informs the brokerages of customer activity. In a sense, the trading screen replaces the trading pit, and the electronic market participants replace the brokers standing in the pit. There is greatly expanded price transparency because the top five current bids and offers are posted on the trading screen for all market participants to see – an advantage that even brokers in a pit don’t have. The exchange computer system keeps track of all trading activity, and identifies matches of bids and offers, with fills generally made according to a first-in, first-out (FIFO) process, although some alternate allocation processes are used in particular markets. Trade information is sent to the clearing house and brokerage, and prices are also instantaneously broadcast to the public. Trades made on CME Globex exchange, for instance, are typically completed in a fraction of a second. In open outcry trading, however, it can take from a few seconds to minutes to execute a trade, according to the complexity of the order.
How does the process of price discovery work?
Futures prices increase and decrease largely because of the myriad factors that influence buyers’ and sellers’ judgments about what a particular commodity will be worth at a given time in the future (anywhere from less than a month to more than two years).
As new supply and demand developments occur and as new and more current information becomes available, these judgments are reassessed and the price of a particular futures contract may be bid upward or downward. The process of reassessment–of price discovery–is continuous.
Thus, in January, the price of a July futures contract would reflect the consensus of buyers’ and sellers’ opinions at that time as to what the value of a commodity or item will be when the contract expires in July. On any given day, with the arrival of new or more accurate information, the price of the July futures contract might increase or decrease in response to changing expectations.
Competitive price discovery is a major economic function–and, indeed, a major economic benefit–of futures trading. The trading floor of a futures exchange is where available information about the future value of a commodity or item is translated into the language of price. In summary, futures prices are an ever changing barometer of supply and demand and, in a dynamic market, the only certainty is that prices will change.
What happens after the closing bell?
Once a closing bell signals the end of a day’s trading, the exchange’s clearing organization matches each purchase made that day with its corresponding sale and tallies each member firm’s gains or losses based on that day’s price changes–a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day. Each firm, in turn, calculates the gains and losses for each of its customers having futures contracts.
Gains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. Thus, if a speculator were to have, say, a $300 profit as a result of the day’s price changes, that amount would be immediately credited to his brokerage account and, unless required for other purposes, could be withdrawn. On the other hand, if the day’s price changes had resulted in a $300 loss, his account would be immediately debited for that amount.
The process just described is known as a daily cash settlement and is an important feature of futures trading. As will be seen when we discuss margin requirements, it is also the reason a customer who incurs a loss on a futures position may be called on to deposit additional funds to his account.
Is the arithmetic of futures trading complicated?
To say that gains and losses in futures trading are the result of price changes is an accurate explanation but by no means a complete explanation. Perhaps more so than in any other form of speculation or investment, gains and losses in futures trading are highly leveraged. An understanding of leverage–and of how it can work to your advantage or disadvantage–is crucial to an understanding of futures trading.
As mentioned in the introduction, the leverage of futures trading stems from the fact that only a relatively small amount of money (known as initial margin) is required to buy or sell a futures contract. On a particular day, a margin deposit of only $1,000 might enable you to buy or sell a futures contract covering $25,000 worth of soybeans. Or for $10,000, you might be able to purchase a futures contract covering common stocks worth $260,000. The smaller the margin in relation to the value of the futures contract, the greater the leverage.
If you speculate in futures contracts and the price moves in the direction you anticipated, high leverage can produce large profits in relation to your initial margin. Conversely, if prices move in the opposite direction, high leverage can produce large losses in relation to your initial margin. Leverage is a two-edged sword.
For example, assume that in anticipation of rising stock prices you buy one June S&P 500 stock index futures contract at a time when the June index is trading at 1000. And assume your initial margin requirement is $10,000. Since the value of the futures contract is $250 times the index, each 1 point change in the index represents a $250 gain or loss.
Thus, an increase in the index from 1000 to 1040 would double your $10,000 margin deposit and a decrease from 1000 to 960 would wipe it out. That’s a 100% gain or loss as the result of only a 4% change in the stock index!
Said another way, while buying (or selling) a futures contract provides exactly the same dollars and cents profit potential as owning (or selling short) the actual commodities or items covered by the contract, low margin requirements sharply increase the percentage profit or loss potential. For example, it can be one thing to have the value of your portfolio of common stocks decline from $100,000 to $96,000 (a 4% loss) but quite another (at least emotionally) to deposit $10,000 as margin for a futures contract and end up losing that much or more as the result of only a 4% price decline. Futures trading requires not only the necessary financial resources but also the necessary financial and emotional temperament.
What risks should I consider when trading?
An absolute requisite for anyone considering trading in futures contracts–whether it’s sugar or stock indexes, pork bellies or petroleum–is to clearly understand the concept of leverage as well as the amount of gain or loss that will result from any given change in the futures price of the particular futures contract you would be trading. If you cannot afford the risk, or even if you are uncomfortable with the risk, the only sound advice is don’t trade. Futures trading is not for everyone.
As is apparent from the preceding discussion, the arithmetic of leverage is the arithmetic of margins. An understanding of margins–and of the several different kinds of margin–is essential to an understanding of futures trading.
If your previous investment experience has mainly involved common stocks, you know that the term margin–as used in connection with securities–has to do with the cash down payment and money borrowed from a broker to purchase stocks. But used in connection with futures trading, margin has an altogether different meaning and serves an altogether different purpose.
Rather than providing a down payment, the margin required to buy or sell a futures contract is solely a deposit of good faith money that can be drawn on by your brokerage firm to cover losses that you may incur in the course of futures trading. It is much like money held in an escrow account. Minimum margin requirements for a particular futures contract at a particular time are set by the exchange on which the contract is traded. They are typically about five percent of the current value of the futures contract. Exchanges continuously monitor market conditions and risks and, as necessary, raise or reduce their margin requirements. Individual brokerage firms may require higher margin amounts from their customers than the exchange-set minimums.
There are two margin-related terms you should know: Initial margin and maintenance margin.
Initial margin (sometimes called original margin) is the sum of money that the customer must deposit with the brokerage firm for each futures contract to be bought or sold. On any day that profits accrue on your open positions, the profits will be added to the balance in your margin account. On any day losses accrue, the losses will be deducted from the balance in your margin account.
If and when the funds remaining available in your margin account are reduced by losses to below a certain level–known as the maintenance margin requirement–your broker will require that you deposit additional funds to bring the account back to the level of the initial margin. Or, you may also be asked for additional margin if the exchange or your brokerage firm raises its margin requirements. Requests for additional margin are known as margin calls.
Assume, for example, that the initial margin needed to buy or sell a particular futures contract is $2,000 and that the maintenance margin requirement is $1,500. Should losses on open positions reduce the funds remaining in your trading account to, say, $1,400 (an amount less than the maintenance requirement), you will receive a margin call for the $600 needed to restore your account to $2,000.
Before trading in futures contracts, be sure you understand the brokerage firm’s Margin Agreement and know how and when the firm expects margin calls to be met. Some firms may require only that you mail a personal check. Others may insist you wire transfer funds from your bank or provide same-day or next-day delivery of a certified or cashier’s check. If margin calls are not met in the prescribed time and form, the firm can protect itself by liquidating your open positions at the available market price (possibly resulting in an unsecured loss for which you would be liable).
Where does my money go when I open an account?
The cornerstone of the U.S. futures trading system is that no futures brokerage company is permitted to hold customer funds in any of its corporate bank accounts. According to strict regulations that are aggressively enforced by the CFTC and NFA, futures brokerage companies are required to maintain customer funds in bank accounts that are totally separate from their own bank accounts. By law, funds deposited by customers may never, under any circumstances, be commingled with the brokerage company’s own funds. Your trading funds will always be carefully and securely held in a “customer segregated funds account.”
What is a futures exchange?
A futures exchange, legally known in the U.S. as a “designated contract market,” is, at its core, an auction market – highly regulated, technical and complex – but an auction market nonetheless.
A futures exchange is the only place where futures and options on futures (which offer the right, but not the obligation, to buy or sell an underlying futures contract at a particular price) can be traded. Trading may take place either on the exchange’s trading floor or via an electronic trading platform. An exchange itself does not trade futures. Instead, it:
Provides and maintains the facilities where buyers and sellers meet, ranging from traditional “trading pits” to global electronic trading networks
Researches, develops and offers futures contracts to be traded
Oversees the trading of its products and enforces trading-related rules and regulations
Monitors and enforces financial and ethical standards
Provides daily and historical data on the contracts traded under its auspices
Futures exchanges in the U.S. are subject to a great deal of regulation. They are monitored by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). In addition, most futures exchanges practice intense self-regulation, monitoring their employees and the trading practices that occur in their facilities.
These agencies look after the public interest, ensure fair practice and monitor the process of price discovery that occurs in futures trading. Other governmental bodies, including the Securities and Exchange Commission, the Federal Reserve Board, and the U.S. Treasury Board also monitor some futures exchange functions. Violations of exchange rules can result in substantial fines, as well as suspension or revocation of trading privileges.
How many f utures exchanges are there?
There are currently 13 futures exchanges registered in the U.S. but not all are hosting active trading. CME is the largest futures exchange in the U.S. by volume, and the first U.S. futures exchange to become a for-profit corporation, after revising its original private membership structure and a becoming publicly traded company in 2002. Most U.S. exchanges remain not-for-profit, private membership organizations, but a number of them are actively weighing the advantages of changing to stock corporations.
There are more than 50 futures exchanges worldwide, and they are structured in a number of different ways. Some futures exchanges are owned by groups of banks or by a stock exchange holding company. Other exchanges, or their holding companies, are publicly listed on a stock exchange, similar to CME.
How do futures exchanges earn money?
Since futures exchanges do not themselves engage in trading, people sometimes wonder how they earn money. Futures exchanges earn income primarily by:
Receiving a fee for every trade made through the exchange.
Selling price data – current, streaming price data in real time as well as historical price data on trades made through the exchange. At CME, data subscription services include CME E-quotes™ and CME E-history.
Charging for clearing services, if the futures exchanges own their own clearing house, as is the case with CME. Some exchanges outsource the clearing function. The Chicago Board of Trade, for example, has its contracts cleared through the CME Clearing House.
BitMex Trading Basics
BitMex is an exchange used for trading futures contracts. This article is an introduction to trading on BitMex. Feel free to use the trading platform to speculate on the price of bitcoin.
Those not into speculation may still find BitMex very valuable. For example, the platform could be used to execute a simple long hedge while waiting for funds to transfer from a bank account to a gateway exchange like Gemini or Coinbase . A BitMex long hedge can lock in a favorable fluctuation in the price of bitcoin for those looking to accumulate the cryptocurrency over time.
Establishing an account on BitMex is straight forward. Only an email address is required to open the account. There are no AML/KYC checks. Consequently, government and other official identification documents are not required to open the account. When prompted, provide a real name or fabricate one. BitMex truly does not care.
Feel free to use this affiliate link to open the account. Use the link to receive a 10% discount on trading fees for the next 6 months. 
BitMex will send an email to the address submitted to verify that the email address entered is valid.
After opening the account with a real (or fictitious) name, a valid email address, and secure password, be sure to set up two-factor authentication (2FA) if planning to significant amounts. BitMex works with Google Authenticator and Yubikey.
Note: BitMex is not available in the United States of America.
An account must be funded with at least $1 worth of bitcoin before it can be used to trade. BitMex only works with bitcoin. Even though cryptocurrency prices are quoted in US dollars, it is not accepted on the platform. BitMex cannot be used to acquire bitcoin. BitMex traders must already have some bitcoin in their possession to fund the account.
Weird, huh? With the passage of time it will seem less weird. Follow these steps to fund the account:
- Log in to the account with the email address, secure password, and optional 2FA credential.
- Click on Account on the top menu bar.
- Navigate to the Wallet section and click on Deposit.
- Send BTC to the QR code or multisignature bitcoin address provided.
20 minutes for the transfer to be acknowledged and credited.
Note: BitMex uses the symbols XBT for bitcoin. It is exactly the same as BTC .
In order to be able to trade at anytime the XBT market moves favorably, and to avoid the
20-minute funding delay, try to maintain a reasonable XBT balance in the exchange wallet. In determining what is reasonable, please bear in mind that cryptocurrency exchanges are constantly under attack. Many have been successfully hacked. BitMex claims to use cold storage. Who knows? Better to play it safe.
Trading is possible once the account is established and funded. However, the BitMex interface for trading is a little more intimidating than the one found on Coinbase.
Apart from the nomenclature, there are some concepts that must be thoroughly understood before trading. Most folks tend to focus on leverage and margin when initially exploring BitMex.
Indeed, leverage is the reason most people use BitMex. Before discussing leverage and margin, it is important to understand what a futures contract is. While many traders flock to BitMex to acquire the ability to leverage bitcoin trades, people tend to overlook what BitMex is actually offering.
Futures contracts are essentially bets on the future state of something. These things are typically commodities, like pork bellies. Yummy!
On exchanges like BitMex, futures contracts are bets on the future value of very liquid cryptocurrencies. XBT, ADA, BCH, EOS, ETH, LTC, TRX, and XRP are very liquid cryptocurrencies. Bitcoin is the most liquid cryptocurrency. It is the cryptocurrency most widely held and traded. It is also the cryptocurrency that this article is really focused on.
Futures contracts derive their value from the underlying cryptocurrency (or underlying asset). Futures contracts are, therefore, derivative financial instruments, or derivatives. They could not exist without the underlying asset. For example, bitcoin derivates cannot exist without bitcoin. Bitcoin is the underlying asset of bitcoin futures contracts.
Futures contracts are technically liabilities. They represent obligations to buy or sell an asset (like bitcoin or pork bellies). Traditionally, this asset is delivered on settlement when the futures contract expires. Read on to learn more about the terms in bold.
All futures contract must be settled at the expiration of the contract. Futures contracts are either physically settled or cash settled.
Traditionally, futures contracts are physically settled. The buyer has the obligation to take physical delivery of the underlying asset from the seller. The seller has the obligation to make physically deliver the underlying asset to the buyer. This exchange happens on contract settlement.
If the underlying asset was XBT, for example, then the seller would be responsible for delivering actual bitcoin to the buyer for the price specified in the futures contract. Fortunately, this is trivial. If the underlying asset was a large number of pork bellies, the seller would have to find a way to physically deliver that bounty to the buyer. Good luck with that! Maybe FedEx will help.
BitMex futures contracts are cash settled. Cash settlement is typically much easier than physical settlement. In the case of pork bellies, cash settlement is definitely a less smelly affair.
The amount to be settled is the difference between the spot price (the real price of the underlying asset at expiration) and futures price (the price specified in the futures contract).
BitMex offers perpetual contracts. Perpetual contracts are a type futures contract that do not expire. According to BitMex,
Perpetual contracts mimic a margin-based spot market.
This is why most traders gloss over the intricacies of futures contracts.
Although perpetual contracts are the most popular contracts on BitMex, there are other types of futures contracts. These contracts are more “traditional” in the sense that they expire. Traditionally, futures contracts expire because the contract is an agreement to buy or sell the underlying asset at a specific date in the future at a specific price.
Some BitMex futures contracts expire in March, June, September, and December. The futures months codes for those months are H, M, U, and Z. They follow an industry standard. So an ADA contract that expires in 2020 on March 29th has a symbol of ADAH19.
Traditionally, most futures contracts are not held until expiration. That is because most traders are feverishly speculating on the fluctuation in price after entering a long or short position. Consequently, there is a big drop in volume as traditional futures contracts near expiration. Only the traders that truly want to buy or sell the underlying asset hold their long or short positions until contract expiration.
Note: This introduction to trading on BitMex is focused on XBTUSD bitcoin perpetual contracts only (see next section).
Bitcoin perpetual contracts are symbolized as XBTUSD contracts on BitMex. The symbols indicate that the underlying asset is bitcoin (XBT) and that the price of the asset is quoted in US dollars (USD).
Perpetual contracts, like other futures contracts, are standardized to make them highly liquid. Essentially, one XBTUSD contract is one US dollar’s worth of bitcoin. This is known as the face value of XBTUSD. On BitMex, all perpetual contracts are denominated in US dollars. That is ironical as the platform bans traders based in the United States. 
Note: Acquiring a bitcoin futures contract (i.e. XBTUSD) is not the same as acquiring bitcoin (aka XBT or BTC). XBTUSD is not XBT. XBTUSD has no private key. It is not a cryptocurrency. XBTUSD is a bitcoin futures contract. It is an agreement to buy or sell XBT at a specific price at a specified time.
There are essentially two positions that traders can assume on futures. Traders can go long or they can go short. Either they assume price is going up and take a “long position” to buy the underlying asset at a specified future date. Or they assume that price is going down and take a “short position” to sell the underlying asset at a specified future date.
Futures contracts are simply agreements (obligations). Consequently, traders do not need to physically possess the underlying asset to take a short position. Future contracts make it possible for traders to take a position on assets that they do not own as long as they offset that position before the expiration of the contract.
To profit from an open long (buy) position, the trader may open an offsetting short (sell) position before the expiration of the contract. This is the equivalent of buying low and selling high. Makes sense right?
The opposite is also true. If the trader has a short contract and wants to profit from a beneficial fluctuation in price, they may go long in an offsetting contract. This is the equivalent of selling high and buying low. This seems illogical and impossible. Yet it is possible. It is possible because futures contracts are standardized obligations. A trader can commit to sell the underlying asset, even if they do not actually possess it, and later commit to buying back the same asset. It does not matter (“have any impact”) since offsetting is performed before the expiration of the contract.
Before speculators can make bets on future prices, BitMex requires traders to make a deposit. That deposit is called the margin. BitMex calls it the initial margin. It is the collateral that protects BitMex when a trader is suffering a significant loss from an adverse fluctuation in the price of the underlying asset.
BitMex uses the margin to ensure that the trader does not default on their contractual obligation. When BitMex uses the margin to cover a trader’s losses it is referred to as a liquidation. Try to avoid liquidation.
A maintenance margin is required after a contract position has been established. The maintenance margin is the minimum amount of funding a trader must have on deposit to maintain an open contract position.
A trader is trading with leverage whenever their contract position is larger than their margin. BitMex allows futures traders to enter long or short positions that are multiples of the amount that they have on deposit in their account. That multiple can be as large as 100. This is known as 100x leverage.
Note: Be sure to review the definitions of contract position and margin if that last paragraph makes no sense.
BitMex created a special type of leveraged trading for gamblers (eh em… traders) that have an affinity for 100x leverage. It is known as cross margin (or spread margin) leverage. A trader may commit the entire amount that they have available on deposit to ensure they do not default on their obligation whenever there are adverse price fluctuations on a 100x leveraged contract position.
Depending on the amount on deposit, cross margin leverage allows these ravenous speculators to hold on to their highly leveraged bet whenever an adverse price fluctuation would have triggered a liquidation event.
The default setting for leverage on BitMex is cross margin (or cross). That might make some traders reflect for a moment. They might ask themselves: What exactly does the default setting encourage?
The alternative to cross margin is isolated margin. Isolated margin allows a trader to limit the margin that could be liquidated in the event that the market moves against them.
Note: BitMex will liquidate a trader’s contract position even if the position is less than margin. BitMex will liquidate a position at 1x leverage if the market moves more than
Longing and Shorting Bitcoin Perpetual Contracts
Traders must place an order to BitMex to take a long or short position on XBTUSD perpetual contracts. There are basically two types of orders: market orders and limit orders.
Market orders are executed at the market price. The market price is a constantly changing price. Essentially, the price is constantly changing because BitMex has a book (or order book) full of orders placed by other traders and is incessantly matching them.
Matching is performed by a matching engine. This order matching engine is not really an engine though. It is a bunch of computers running special code.
To place a market order:
- Navigate to the Place Order menu.
- Click on the Market tab.
- Enter the quantity of XBTUSD perpetual futures contracts to either long or short.
- Click on either the “Buy Market” or “Sell Market” button.
Note: Traders are forced to take the market price if they want their order executed immediately. Market orders take liquidity .
Limit orders are executed when the market price crosses a specific threshold called the limit price. The limit price is specified by the trader. It is their reservation price. It is the most they will pay to go long on a perpetual contract or the least they will pay to go short.
To make a limit order:
- Navigate to the Place Order menu.
- Click on the Limit tab.
- Enter the quantity of XBTUSD perpetual futures contracts to either long or short.
- Enter a limit price for XBT in USD.
- Be sure to click Post-Only.
- Click on either the “Buy/Long” or “Sell/Short” button.
Note: BitMex gives rewards to traders that place limit orders. Limit orders make liquidity . Try to place limit orders as often as possible.
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 Technically, perpetual contracts on BitMex do expire. They expire every 8 hours.
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