Basics of derivatives trading: what is a futures contract and how does it work

A futures contract is a derivative financial instrument that allows traders to profit regardless of the direction of price movement. Unlike traditional asset purchases, this contract involves obligations — the seller commits to delivering the asset in the future, and the buyer agrees to purchase it at a predetermined price at a specific time.

Key Differences Between Futures and Spot Trading

The main difference lies in the nature of the transactions themselves. In the spot market, you acquire the actual asset and become its owner immediately. Futures trading works differently — market participants deal with contracts that represent obligations, not the assets themselves.

Key parameters that distinguish these two types of trading:

Price Determination Mechanism
In the spot market, a transaction is executed instantly at the current market price. In futures trading, the price is fixed at the time of opening the position and remains unchanged until the contract’s expiration date. The futures price includes the current spot price of the underlying asset plus financing costs until expiration.

Use of Leverage
One of the main features of futures contracts is the ability to trade with leverage. This means that opening a position does not require paying the full contract value. Only the initial margin — a certain percentage of the total cost — needs to be frozen. The higher the leverage, the less capital is required, but the risks of losses also increase.

Liquidity Depth
Cryptocurrency futures markets are generally characterized by deeper liquidity compared to spot markets. This allows traders to open and close large positions quickly and with minimal slippage. High liquidity also reduces the risk of being unable to exit a position.

Opportunities and Advantages of Futures Trading

Futures contracts offer traders many strategic opportunities. The main advantage is the ability to profit not only from rising prices but also from falling prices. To do this, simply open a short position.

Thanks to the flexibility of futures, traders can develop complex trading strategies, including spreads, arbitrage, and combined positions. These contracts are also widely used for portfolio hedging — protecting against extreme price fluctuations and unforeseen market movements.

An important function of futures is the ability to diversify capital. Distributing funds across different assets and contracts is one of the most effective methods of risk management and portfolio optimization.

Risks to Consider

Despite attractive opportunities, trading futures involves significant risks. Market volatility can lead to rapid liquidation of a position if the price moves against the open trade. Overestimating your capabilities and using excessive leverage are the most common reasons for losing funds.

Poorly planned trading strategies combined with high volatility can result in substantial losses. That’s why, before engaging in active trading, it is critically important to:

• Carefully study how futures contracts work
• Develop a clear risk management plan
• Determine the optimal position size and leverage for your experience level
• Practice on a demo account to refine your strategy without risking real funds

Approach to Successful Trading

Trading futures requires discipline and understanding of market mechanisms, but it is not an insurmountable task. With thorough market analysis, proper risk calculation, and disciplined trading, results can be quite impressive.

The key to success is not rushing into real account trading. First, understand the basics, study exchange instruments, practice in a safe environment, and only then start trading with minimal positions. As confidence and skills grow, you can gradually increase the scale of your trading operations.