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Bitget Beginner's Guide — Key Futures Trading Terms and Their Application Scenarios

Bitget Beginner's Guide — Key Futures Trading Terms and Their Application Scenarios

Beginner
2024-04-30 | 20m

Overview

● Futures trading involves a more complex set of terms compared to spot trading. Understanding these terms and their applications can help us become more familiar with futures trading quickly.

● Common and important terms are illustrated with examples at the end of some sections or explained through links to other articles to elaborate on the meanings of these terms and how they are used in trading decisions.

● Using Bitget Futures as an example, this article consists of three parts: before opening a position, when holding a position, and when closing a position. It also covers other key terms to help beginners understand the terms and functions used throughout the entire trading process.

Key terms in futures trading

Key term Meaning Scenario

Going long or short

Going long is an action that a user might take when they anticipate a price increase and buy futures with the intention of selling them at a higher price later to make a profit. On Bitget Futures Trading page, selecting 'Open long' initiates a long position. Conversely, going short is when a user predicts a price drop and sells futures with the intention of buying them back at a lower price to earn a profit. On Bitget Futures Trading page, selecting 'Open short' initiates a short position.

Before opening a position

Leverage

Choosing the right leverage is crucial. It is a double-edged sword that amplifies profits but also increases the potential for losses. The higher the leverage, the greater the risk of liquidation. Traders should select a leverage that best suits them. For instance, conservative or new traders might want to opt for lower leverages, such as 5x or 2x. Their leverage choice should be determined by the trader's understanding of the cryptocurrency market, risk tolerance, and comfort level.

Before opening a position

Margin/opening margin/maintenance margin

Margin, also known as the insurance fund, is used to cover collateral shortfalls, thereby reducing the likelihood of auto-deleveraging on the platform. Margin = position value ÷ leverage.

Opening margin refers to the margin in the account required to open a position for futures trading.

Maintenance margin is the minimum margin required to continue holding the position, which varies based on the user's risk limit.

Before opening or when holding a position

Position value

This refers to the current value of the held position, which changes in real-time according to the last price. Note that the calculation of position value varies depending on the type of futures.

When holding a position

Funding rate/countdown

Funding rate is used to calculate the funding fee that is exchanged directly between buyers and sellers every 8 hours at 12:00 AM, 8:00 AM, and 4:00 PM (UTC). Countdown indicates the time remaining until the next funding rate adjustment.

Any time

Mark price/index price/last price

Mark price is determined by the index price and the upcoming funding rate, reflecting the current fair price of the futures. The mark price is also used to calculate the unrealized PnL of the position and trigger liquidation.

Index price is the sum of the prices from various spot exchanges multiplied by their respective weights.

Last price refers to the latest execution price of the futures.

Before opening or when holding a position

Isolated margin/Cross margin

Isolated margin allows users to hold positions in both directions, with risks calculated independently for long and short positions. A specific amount of margin is allocated to each position. If the margin falls below the maintenance margin level, the position will be liquidated and the maximum loss incurred will be limited to the margin allocated to that position. You can add and remove margin for a particular position in isolated margin mode.

In cross margin mode, all positions under the same margin asset share the same margin balance. In the event of liquidation, users may risk losing the full margin balance along with any positions under the margin asset. In other words, all available balances in the account can be used as margin to avoid the liquidation of a position.

Before opening a position

Limit order/market order

Limit order refers to an order placed in the order book with a specific price limit set by the user. The order is only executed when the market price reaches, or is higher than, the current bid/ask price. Limit orders help users buy low or sell at a price higher than the current market price. Unlike a market order, which executes immediately at the current market price, a limit order is placed in the order book and only triggered when the price is reached.

Market order involves the system placing an order at the price most likely to be filled. If the order is not filled or not fully filled, the system continues to place orders at the latest price most likely to be filled.

Before opening a position

Take-profit/stop-loss

A take-profit (TP) order closes a position once it becomes profitable, while a stop-loss (SL) order limits losses on a current position. Take-profit and stop-loss orders can be easily placed via the TP/SL function.

Before opening or when holding a position

Realized PnL/unrealized PnL

Realized PnL refers to the profit or loss of a closed position, including transaction fees. Unrealized PnL is based on the estimated profit of loss of a position at the current market price, excluding transaction and funding fees.

When holding a position

Close position/liquidation

Closing position involves buying or selling futures of the same type, quantity, and delivery month in the opposite direction to the futures held. This is done to settle the futures trade. This can also be understood as the action of closing a position through hedging in the opposite direction. Closing a position in futures trading is like selling a position in spot trading.

Liquidation occurs when a position's margin falls below the maintenance margin level, causing the complete loss of the entire margin collateral. It is triggered when the mark price reaches the liquidation price of the position.

When holding a position or closing a position

Before opening a position

As mentioned earlier, there are different types of futures trading, primarily USDT-M/USDC-M Futures and Coin-M Perpetual/Delivery Futures. The differences between these two types lie in the quote unit, holding time, and contract value. Although many terms are commonly used in both futures types, there are minor differences. This article will focus on Bitget USDT-M/USDC-M perpetual futures to assist beginners with futures trading.

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Glossary order: from top to bottom, left to right

USDT-M/USDC-M (Perpetual) Futures: USDT-M / USDC-M Futures also known as forward futures, are futures based on fiat stablecoins (USDT or USDC). In USDT-M/USDC-M Futures, the value of the contract is calculated in USD. These futures allow investors to assess the value and risks of the contract more intuitively. Investors can trade cryptocurrencies directly with stablecoins such as USDT and USDC without actually purchasing Bitcoin or other cryptocurrencies, thus avoiding the risk of price drops in these coins. USDT-M/USDC-M Futures are particularly suitable for beginners who are new to futures trading.

Using BTCUSDT perpetual futures as an example, if a user holds 1 BTCUSDT and the price of BTC rises by $1000, the user will make a profit of $1000, and vice versa. Since USDT-M/USDC-M Futures are always settled in USDT or USDC, all margin and PnL are also calculated in USDT or USDC.

Mark price: The mark price is determined by the index price and the upcoming funding rate, reflecting the current fair price of the futures. The mark price is also used to calculate the unrealized PnL of the position and trigger liquidation.

Index price: The sum of the prices from various spot exchanges multiplied by their respective weights.

Last price: As the name suggests, it refers to the last execution price of the futures trading pair.

The three prices serve distinct purposes. The index price does not require close monitoring as it is a weighted average used to balance futures prices across different exchanges. This averaging process helps minimize disparities in futures prices among exchanges. In contrast, the last price and mark price serve very different roles. For instance, if the mark price represents the global average price of gasoline, the last price would be the price per gallon at a specific gas station near your location.

Due to demand and supply dynamics in futures trading, it often results in a discrepancy between the futures price and the price of the underlying asset. This contrasts with spot trading where there is only one price. For users, the mark price is not typically used in trading and serves as an indicator to monitor the risk of a position, while the last price acts as the default market price in trading.

However, the mark price is the estimated fair value of the futures, which takes into account the fair value of the asset to prevent unnecessary liquidation during market volatility. Mark price functions in two areas: liquidation and unrealized PnL calculation.

Bitget Futures uses the mark price as a condition to trigger liquidation. In practice, if the spot price of an asset has not reached the liquidation level, the mark price protects users from unfair liquidation caused by short-term fluctuations in the last price.

In addition, since it may be difficult for users to know the actual realized profit before closing their positions, the mark price is used as a reference for calculating unrealized PnL. This ensures that the unrealized PnL is accurately calculated, thus avoiding unnecessary liquidations.

Liquidation: Liquidation occurs when a position's margin falls below the maintenance margin level, causing the complete loss of the entire margin collateral. It is triggered when the mark price reaches the liquidation price of the position.

Unrealized PnL: The estimated profit and loss of a position based on the current market price, excluding transaction and funding fees.

Funding rate/countdown: Funding rate is used to calculate the funding fee that is exchanged directly between buyers and sellers every 8 hours at 12:00 AM, 8:00 AM, and 4:00 PM (UTC). Countdown indicates the time remaining until the next funding rate adjustment.

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Glossary order: from left to right, top to bottom

Order book: This displays the real-time prices and quantities for users' open orders. Note that this is not a record of completed transactions but merely a record of pending orders. If you have opened a position that has not yet been executed, you can see your order in the order book.

Transaction history: This shows the real-time records of completed transactions, where you can see the executed price, quantity, and time.

Isolated margin mode: This mode allows users to hold positions in both directions (long and short), with the risk calculated independently for each. A specific amount of margin is allocated to each position. If the margin falls below the maintenance margin level, the position will be liquidated, and the maximum loss incurred will be limited to the margin allocated to that position. You can add and remove margin for a particular position in isolated margin mode.

Cross margin mode: In this mode, all positions within the same margin asset share the same margin balance. In the event of liquidation, traders may risk losing the full margin balance along with any positions under the margin asset. In other words, all available balances in the account can be used as margin to avoid the liquidation of a position.

Leverage: Choosing the right leverage is crucial. It is a double-edged sword that amplifies profits but also increases the potential for losses. The higher the leverage, the greater the risk of liquidation. Traders should select a leverage that best suits them. For instance, conservative or new traders might want to opt for lower leverages, such as 5x or 2x. Their leverage choice should be determined by the trader's understanding of the cryptocurrency market, risk tolerance, and comfort level.

Limit order: Limit order refers to an order placed in the order book with a specific price limit set by the user. The order is only executed when the market price reaches, or is higher than, the current bid/ask price. Limit orders help users buy low or sell at a price higher than the current market price. Unlike a market order, which executes immediately at the current market price, a limit order is placed in the order book and only triggered when the price is reached.

BBO: Also known as best bid offer, BBO is a type of limit order. BBO allows traders to quickly set limit order prices that align with the current Queue 1, Queue 5, Counterparty 1, or Counterparty 5 prices, potentially facilitating faster order execution and better price matching. When a BBO order is placed, it is automatically adjusted to the best available price at the time of order placement.

Market order: The system places an order at the price most likely to be filled. If the order is not filled or not fully filled, the system continues to place orders at the latest price most likely to be filled.

For beginners, both limit orders and market orders are user-friendly methods of placing trades. The difference lies in the order placing method preferred by different users. Bitget spot trading also offers both limit and market order options.

Post-only: In this mode, orders are not immediately executed in the market, ensuring that the trader is always the maker. If a post-only order is filled immediately by an existing order, it will be canceled.

Trailing TP/SL: A special instruction that allows users to place a pre-defined order when the market moves against or in favor of their trade, helping them to limit losses and protect profits during market fluctuations. It works by placing a preset order at a specific percentage away from the market price, allowing users to lock in profits if the price moves in a favorable direction.

As the market price moves in a favorable direction, the trailing TP/SL adjusts accordingly and maintains a set distance in a specific percentage or amount from the market price. This allows users to retain their positions and continue to profit as the price moves favorably. However, if the price moves by a specific percentage in the opposite direction, the trailing TP/SL will close the position at the market price. This helps limit losses and protect profits by closing positions when the price moves unfavorably.

Trigger order: This order will be placed at a pre-defined quantity and price when the market price reaches the trigger price. Funds will not be frozen before the order is triggered. The order may not be executed as it is subject to a pre-defined price or leverage tier.

Generally, trigger orders and trailing TP/SL orders are not suitable for first-time futures traders.

Calculator: A calculator can calculate PnL, including margin, risk/reward, take-profit PnL, take-profit ROI, stop-loss PnL, and stop-loss ROI. Additionally, Bitget Futures' calculator can calculate target price, liquidation price, average price, and more. Note that the price or value calculated by the calculator is for reference only, and does not include actual transaction fees or other fees.

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TP/SL: A take-profit (TP) order closes a position once it becomes profitable, while a stop-loss (SL) order limits losses on a current position. Take-profit and stop-loss orders can be easily placed via the TP/SL function.

Good till cancel (GTC): A normal limit order that remains effective until canceled.

Fill or kill (FOK): If an order is not immediately executed in full, it will be completely canceled.

Immediately or cancel (IOC): If an order cannot be executed immediately, the unexecuted portion will be canceled.

The concepts covered above are essential for users to understand before opening a position. Key terms like mark price, last price, cross margin, isolated margin, leverage, limit order, and market order are crucial for placing futures orders and should be thoroughly understood. Next, we will proceed to place futures orders, and there are still some important concepts that we need to learn.

When holding a position

Position opening: It means placing a futures order. However, it is important to note that opening a position does not mean buying or selling. Users still need to select either 'Open long' or 'Open short' when placing a trade. If a user feels bullish about a particular futures asset, select 'Open long'; otherwise, select 'Open short'.

Opening fee: The transaction fee set aside by the system to afford the estimated fees needed to open the position.

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Margin: Also known as the insurance fund, margin is used to compensate collateral shortfalls, thereby reducing the likelihood of auto-deleveraging on the platform. Margin = position value ÷ leverage. Understanding the concept of margin is crucial in futures trading, and it encompasses several concepts that vary over time. This article outlines some of the more common margin concepts.

Maintenance margin: The minimum margin required to continue holding the position, which varies based on the user's risk limit.

Maintenance margin rate: The margin amount corresponding to the position size tier. When the margin rate of a position falls below the maintenance margin rate, a partial or full liquidation will be triggered.

Position margin: Initial margin + transaction fees required to close the position.

Order margin: The sum of all margins for active orders that are pending execution.

Initial margin: The margin required to open a position for margin trading.

Margin ratio: Measures the risk of a user's current position. When it reaches 100%, liquidation or partial liquidation will be triggered. Margin ratio = current position's maintenance margin ÷ (account equity – amount frozen for orders under isolated margin mode – unrealized PnL of the isolated margin position – isolated margin for the position).

Account equity: All assets held by the user in their futures account. Account equity = amount deposited + total realized PnL + total unrealized PnL (trading bonuses are included in the account equity).

Available funds: The funds available for opening positions. It includes the unrealized PnL of positions in cross margin mode but excludes the unrealized PnL of positions in isolated margin mode. Available funds = account equity – invested funds – unrealized PnL in isolated margin mode.

Realized PnL: The profit or loss of a closed position, including transaction fees.

Return on investment (ROI): It refers to the percentage ratio between the profits from an investment and the costs incurred. It is an indicator used to measure investment efficiency and profitability.

Trading bonus: Users can use trading bonuses for trades within a volume range or invest them in certain products but cannot withdraw or transfer them to other accounts (trading bonuses are virtual assets).

Unrealized PnL: The estimated profit and loss of a position based on the current market price, excluding transaction and funding fees.

Fund leverage: The leverage of all positions held by a user.

Used margin: It refers to the locked margin of all trading pairs under cross margin mode + margin of all positions under isolated margin mode + total frozen cost for opening positions. Although the explanation of "used margin" is relatively complex, we do not recommend beginner traders use both cross margin and isolated margin modes at the same time when starting out in futures trading. It is better to keep things simple at the beginning.

Minimum orders: The minimum number of orders that can be placed.

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Position: All futures orders held.

Open orders: All open orders that have been placed. Note that the orders are not filled.

Average position price: The average price of a position.

Order details: The transaction details of all your filled orders, including the average price, volume, and transaction time.

Estimated liquidation price: The estimated price at which the liquidation is likely to occur, is calculated based on the position margin ratio. Although it does not reflect the actual liquidation price, the user still needs to be aware of this price.

Position TP/SL order: The order is applied to the entire position (the existing position and any subsequent adds or closures). When the latest market price or reasonable mark price reaches the trigger price, the order of the configured size will be placed at the best price. This TP/SL order will expire automatically when the position is fully closed.

MMR SL: It is a stop-loss feature based on the margin ratio (MMR) developed by Bitget to minimize the risk of liquidation. For futures trading, the risk of a position is measured based on MMR, with a higher MMR representing a higher risk. Liquidation occurs when the MMR reaches 100%. By using the MMR value to set a stop-loss, we can minimize the risk of liquidation.

With MMR SL, you can set a threshold from 70% to 90%. If you set a threshold of 85% for a BTCUSDT long position, the system will close all BTCUSDT long positions when the MMR is equal to or greater than 85%.

As discussed in this section, understanding the concept of margin is crucial. Additionally, the various take-profit and stop-loss features mentioned can help users better understand the characteristics of futures products.

Key terms for position closing and other important concepts

Close position: It involves buying or selling a futures of the same type, quantity, and delivery month in the opposite direction to the futures held. This is done to settle the futures trade. This can also be understood as the action of closing a position through hedging in the opposite direction. Closing a position in futures trading is like selling a position in spot trading.

Transaction fee: It refers to the fees received from or payable to traders for executing trades on the platform.

Net PnL: The final profit or loss after all fees have been deducted.

Auto-deleveraging: Abbreviated as ADL, it refers to a mechanism for the liquidation of counterparty positions to control overall risk when extreme market conditions or force majeure situations lead to insufficient risk provision or a rapid decline in risk provision.

Automatic margin call in isolated margin mode: It helps users to avoid liquidation by promptly topping up the required margin for a position in isolated mode. Once enabled, the required margin to avoid liquidation will be transferred to the position from your available margin.

Suppose a user has an available balance of 600 USDT, and the current BTC price stands at 27,249.5 USDT. The user opens a long position of 0.1 BTCUSDT with 10X leverage, requiring an initial margin of 272.495 USDT. The liquidation price is calculated to be 24,637.9 USDT, and the available balance is 327.505 USDT.

When the mark price falls below the liquidation price of 24,637.9 USDT, an automatic margin call is triggered to prevent the position from being liquidated. As a result, 272.495 USDT is being added to the position's margin, bringing the available balance to 55.01 USDT. Consequently, the new liquidation price is 21,900.4 USDT, and the initial margin for this position is 544.99 USDT.

In the event that the price of BTCUSDT continues to decline and falls below the liquidation price of 21,900.4 USDT, an automatic margin call will be triggered again. This time, only 55.01 USDT is left in the available balance, which will be added to the position's margin and bring the liquidation price to 21,347.7 USDT.

If the balance in the account is depleted, the position will ultimately be liquidated when the price falls below 21,347.7 USDT, as an automatic margin call is unable to be triggered.

Flash close: The system places an order at the price most likely to be filled. If the order is not filled or not fully filled, the system continues to place orders at the latest price that is most likely to be filled.

Risk margin: Due to the high volatility of cryptocurrency markets and the inability to trace the exact loss in case of liquidation, Bitget establishes a risk margin system to mitigate the risk of liquidation. After the liquidation is triggered and completed, any remaining assets in the account will be deposited into the risk margin. If the account balance is negative, the deficit will be deducted from the risk margin.

Note: The order price after a liquidation is triggered is influenced by market volatility and depth. As a result, the final risk fund may not completely align with the liquidation trigger price.

Conclusion

By now, you should recognize that diving into futures trading without a deep understanding of these terms can be costly and unwise. Futures trading is complex and high-risk, so it's crucial for traders to understand every aspect of their trading activities. This article should have provided you with a deeper insight into how to trade, hopefully helping you to make trading decisions more easily.

Nevertheless, always trade with caution and develop a strategy that suits your specific needs. You shouldn't always have to learn through failures; proactive preparation and strategic foresight are hallmarks of wise trading.

Recommended readers to further understand Bitget Futures:

Bitget Beginner's Guide — How To Make Your First Futures Trade

Bitget Beginner's Guide — What Are Futures?

Bitget Beginner's Guide — A Comprehensive Introduction to USDT-M Futures, USDC-M Futures, and Coin-M Futures

Bitget Beginner's Guide — How to Avoid Liquidation