A Complete Guide to Contract Trading for Beginners

Contract trading is a popular method in the digital asset space that allows traders to speculate on price movements without owning the underlying asset. This guide explains the core principles, from going long and short to managing risk with leverage and stop-loss orders. By the end, you’ll understand how to participate in this market confidently and responsibly.

Understanding Long and Short Positions

In trading, "going long" means buying an asset with the expectation that its price will rise. Conversely, "going short" involves selling an asset with the anticipation that its price will fall.

Let’s illustrate with an example:

Imagine you plan to travel from China to Singapore on October 15. On October 9, the exchange rate is 1 Singapore Dollar (SGD) = 5.43 Chinese Yuan (CNY). You exchange 5,000 CNY for approximately 920 SGD. Later, your trip gets canceled, and you convert your SGD back to CNY on October 14. By then, the rate has changed to 1 SGD = 5.5 CNY. Your 920 SGD now gives you 5,060 CNY—a profit of 60 CNY.

In this scenario, you effectively "went long" on the SGD/CNY pair by buying SGD. Closing the position by selling SGD completed the trade, locking in your gain.

What Is Contract Trading?

Contract trading involves agreements to buy or sell an asset at a predetermined price on a future date. Unlike spot trading, you don’t own the asset itself. Instead, you trade a contract that derives its value from the underlying asset’s price movements.

Going Long with Contracts

If you open a long contract for Bitcoin at $60,000, you profit if the price rises. For instance, if Bitcoin reaches $65,000 at expiration, you gain $5,000 per contract. If it falls to $55,000, you lose $5,000.

Going Short with Contracts

If you open a short contract at $60,000, you profit if the price drops. A decline to $55,000 yields a $5,000 gain. If the price rises to $65,000, you incur a $5,000 loss.

You don’t need to hold the contract until expiration. To close a position, you execute an opposing trade of equal size. For example, to exit a 0.5 BTC long contract, you open a 0.5 BTC short contract. Your profit or loss is calculated as:

(Exit Price − Entry Price) × Position Size

If you entered at $60,000 and exited at $70,000 with a 0.5 BTC position, your profit would be $5,000.

Margin and Leverage Explained

Contract trading uses margin, meaning you deposit collateral to open positions. Leverage allows you to control larger positions with a smaller amount of capital.

Types of Margin

• USDT-Margined Contracts: Use USDT as collateral. Profits and losses are settled in USDT.
• Coin-Margined Contracts: Use the base currency (e.g., BTC) as collateral. These are less common than USDT-margined contracts.

How Leverage Works

Suppose you deposit $1,000 as margin and use 60x leverage. The exchange lends you $60,000 to open a position. If the trade moves against you, losses are deducted from your margin. If losses exceed your margin, the position is liquidated to prevent further debt.

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Platform Navigation and Trade Execution

To start trading, select a contract type (e.g., perpetual or quarterly futures) and a trading pair. Perpetual contracts have no expiry date, while quarterly futures settle on a fixed date.

Isolated vs. Cross Margin

• Isolated Margin: Allocates specific margin to each position. If one position is liquidated, others remain unaffected. Recommended for beginners.
• Cross Margin: Uses your entire account balance as margin. This increases flexibility but raises the risk of full account liquidation.

Leverage Settings

Leverage can range from 1x to 100x. Higher leverage amplifies both profits and losses. For example:

• A 5x long position yields a 5% gain if the asset rises 1%.
• The same position incurs a 50% loss if the asset falls 10%.
• At 10x leverage, a 10% drop results in a 100% loss (liquidation).

Use the built-in calculator to simulate potential profits, losses, and liquidation prices before trading.

Placing Orders: Step by Step

1. Select a Asset: Choose a contract like BTC or ETH perpetual.
2. Set Margin Mode: Opt for isolated margin to limit risk.
3. Choose Leverage: Start with lower leverage (e.g., 5x–10x).

4. Order Type:

   • Market Order: Executes immediately at the current price.
   • Limit Order: Executes only at a specified price.
5. Open Position: Click "Buy/Long" or "Sell/Short" to enter the trade.

After opening a position, monitor key metrics:

• Mark Price: The average price across major exchanges, used for liquidation.
• Liquidation Price: The price at which your position will be closed due to insufficient margin.
• Unrealized P&L: Your current profit or loss.

Managing Positions: Partial Closes and Hedging

To reduce exposure, you can partially close a position. For example, if you hold an 820 POPCATS short, opening a 420 POPCATS long reduces your net short to 400 POPCATS. Conversely, adding more short positions increases your exposure.

Using Stop-Loss and Take-Profit Orders

Stop-loss (SL) and take-profit (TP) orders automate risk management.

Types of Orders

• Trigger-Based TP/SL: A market order executes when the price hits a specified level.
• Limit TP/SL: A limit order is placed when the price reaches the trigger, but it may not fill if the market moves rapidly.

How to Set TP/SL

1. In the position panel, click "Stop-Loss & Take-Profit."
2. Set trigger prices for TP and SL.
3. Select "Full Position" to close the entire trade.

You can also set TP/SL when opening a new position. Drag the lines on the chart to adjust levels dynamically.

Advanced Tools: Trailing Stop

A trailing stop automatically adjusts the stop-loss price as the market moves in your favor. It locks in profits while allowing room for growth.

For example:

• Entry price: $1.00
• Current price: $1.20
• Trailing stop set at 7%回调

If the price drops 7% from its peak ($1.20 × 0.93 = $1.116), the position closes. This tool helps capture trends while protecting gains.

Use drawing tools like trendlines to identify support/resistance levels and set trailing stops accordingly.

Market Analysis and Strategy

Always base trades on analysis, not emotion. Use chart tools to identify trends:

• Uptrend: Higher lows and higher highs.
• Downtrend: Lower highs and lower lows.

Focus on high-liquidity assets to reduce slippage. Check the "Market" section to sort contracts by 24-hour trading volume.

Frequently Asked Questions

What is the difference between isolated and cross margin?
Isolated margin restricts risk to individual positions, while cross margin uses your entire account balance. Beginners should use isolated margin to avoid unnecessary losses.

How is leverage calculated?
Leverage multiplies your margin. For example, 10x leverage lets you control a $10,000 position with $1,000 margin. Profits and losses are based on the full position size.

What triggers liquidation?
Liquidation occurs when losses exceed your margin balance. The liquidation price is calculated based on leverage, entry price, and margin amount.

Can I trade contracts without expiration dates?
Yes, perpetual contracts have no expiry. Quarterly and monthly futures have fixed settlement dates.

How do I avoid volatile liquidations?
Use lower leverage, set stop-loss orders, and monitor mark prices instead of last traded prices.

Is contract trading suitable for beginners?
It involves high risk. Start with small positions, use isolated margin, and practice with a calculator before committing real funds.

Final Thoughts

Contract trading offers opportunities but requires discipline. Use risk management tools, start with low leverage, and prioritize learning over profits. As you gain experience, you’ll develop strategies that align with your goals and risk tolerance.