Futures trading can be a complex world, full of specific terminology and formulas. This article aims to simplify these concepts to help you navigate the futures market with confidence.
Long: Taking a long position means buying an asset with the expectation that its value will increase. This strategy reflects a bullish attitude towards the market.
Short: Shorting involves selling a security you do not own, with the hope of buying it back at a lower price. This strategy is used when an investor anticipates a decline in the asset's price in the short term.
Collateral/Margin: Collateral is an asset of value pledged to secure a loan. In futures trading, this is referred to as margin. It ensures that the trader can cover potential losses.
Prices:
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Entry price: The average price at which you buy or sell to open a position.
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Close price: The average price at which you buy or sell to close a position.
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Last price/market price: The most recent transaction price of the asset.
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Mark price: The mark price represents an estimated value of futures contracts, taking into account various factors. It is a comprehensive price based on index price, used for PNL calculation and liquidation.
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Index price: The index price is an integrated price derived from multiple exchanges, providing a benchmark to compare against different exchange prices.
Liquidation: Liquidation occurs when all or part of your position is forcefully closed, depending on the margin mode.
Margins:
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Cross margin: In cross margin trading, your entire margin account serves as collateral for all open positions. This strategy distributes risk across all assets, helping to guard against liquidation.
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Isolated margin: Isolated margin allows you to allocate a specific amount of capital to a single trading position, isolating the funds from your overall account balance.
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Maintenance margin: The maintenance margin is the minimum amount of equity that must be maintained in the margin account to avoid liquidation.
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Margin balance: The margin balance refers to the funds occupied in the position.
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Maintenance Margin Ratio (MMR): The MMR is calculated as Maintenance Margin / Margin Balance. When the MMR reaches 100%, liquidation will occur.
Profit and Loss (PNL)
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Profit and Loss (PNL): PNL is calculated as (entry price - close price) * quantity.
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Return on Investment (ROI) & Return on Equity (ROE): ROI and ROE measure the profitability of an investment relative to its cost or the equity involved.
Funding Fee: The funding fee is calculated as Position Value * Funding Rate. It bridges the gap between the spot price and the futures contract price, managing profits and increasing liquidation risks.
Auto-Deleveraging (ADL): ADL refers to a forced liquidation mechanism to control platform risk when a counterparty has a position shortfall or in extreme market conditions. When ADL is triggered, the ADL engine selects users with the highest leverage return to reduce their positions.
Take Profit Order (TP): A take-profit order specifies the exact price to close an open position for a profit.
Stop Loss Order (SL): A stop-loss order instructs to close a position once a specific target is reached or exceeded to prevent further losses.
Time in Force (TIF)
Time in Force (TIF): TIF is an instruction indicating how long an order remains active before it is executed or expires. Common TIF options include GTC, IOC, FOK, and Post Only.
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Good Till Cancelled (GTC): GTC orders remain in the order book until filled or canceled by the user (limit order).
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Fill or Kill (FOK): FOK orders are executed only if they can be fully filled. For example, a FOK order to buy 1 BTC at $35,000 will only execute if there is at least 1 BTC available at that price.
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Immediate or Cancel (IOC): IOC orders execute against available orders in the order book immediately. Any unfilled portion of the order is canceled (market order).
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Post Only: Post-Only Orders are placed in the order book and only execute as maker orders. If they cross the book, they are canceled, ensuring you only pay maker fees.
Understanding these terms and formulas is essential for effective futures trading. By grasping these concepts, you can better navigate the market and make informed trading decisions! Dive into HashKey Global compliant futures journey today!
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