3 ways to use futures traders and avoid liquid losses

Periodically, there are leaks of $100 million or more in Bitcoin (BTC) and crypto futures contracts, which novice investors and non-expert analysts point to excessive leverage on retail traders as the culprit.

There is no doubt that gamblers have a large share of these risky bets, especially with retail-oriented exchanges such as Bybit and Binance, but not every futures liquidation is the result of reckless use.

Not all future liquidations are due to use

Some trading strategies used by professionals also dissolve during sudden sharp price spikes, but they do not necessarily indicate a loss or a sign of overuse. The Chicago Mercantile Exchange (CME), OKX, and Deribit show significantly lower liquidity ratios compared to retail-based exchanges, indicating that traders are often deploying superior strategies.

It is very easy to use futures markets, especially perpetual contracts (inverse swaps). Almost all crypto exchanges offer leverage of 20x or more, requiring only an initial deposit, known as margin.

However, unlike regular spot trading, a futures contract cannot be traded off the exchange. These leveraged futures contracts are artificial, but offer the opportunity to short, meaning one can bet on the price.

These derivatives tools have unique advantages and can improve a trader's results, but overconfident traders will be profitable in the medium to long term. To avoid falling into this mental trap, pro traders deploy three different strategies to maximize profits without relying solely on directional trading.

Forced fluids on low fluid pairs

Wells uses futures contracts to exploit volatile markets by targeting low-liquidity pairs. They open high leveraged positions in anticipation of forced liquidations due to insufficient margins. This triggers a chain reaction, pushing the market in the preferred direction.

For example, if a price cut is desired, a large quantity will be sold, causing other traders to sell and sell, causing the price to drop. Even if it seems like money is lost at first, the loss effect will benefit the strategy.

To execute this strategy requires large capital and multiple accounts. Effectively uses market mechanics to create maximum impact. Understanding market behavior is critical to this approach.

Cash and carry transaction

Cash and commodity trading involves buying an asset in the spot market and selling a futures contract on the same asset. This strategy locks in the price difference between the spot and futures prices. Traders hold the asset until the futures contract expires, making a profit at maturity with these prices.

This arbitrage approach is low risk and takes advantage of price volatility between markets. It is particularly effective in stable markets, providing consistent income regardless of overall market volatility, making it the preferred strategy for risk-averse investors.

Funding amount arbitration

Fixed contracts (reverse swaps) charge funds every eight hours to balance buyers and sellers. This amount varies with market demand. When buyers (long-term) want more leverage, the funds rate will be positive, prompting buyers to pay fees.

Market makers and arbitrage desks take advantage of these differences by opening leveraged positions and buying and selling in the spot market. They also examine the difference between swaps or perpetual and monthly contracts.

This so-called funding rate arbitrage involves investing capital at different rates in the markets, which requires constant monitoring and precise execution to maximize profits while effectively managing risk.

Basically, using derivatives requires knowledge, experience and a high level of capital to deal with market volatility. However, arbitrage strategies such as funding rates can also be effective in less volatile markets with less price action. These approaches ensure that even in stable market conditions, productivity can be used carefully to maximize profits.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.