Top Metrics to Monitor in Crypto Futures Trading
Top Metrics to Monitor in Crypto Futures Trading
Crypto futures are a great way for traders to speculate and capitalize on market trends to use leverage and buy or sell cryptocurrencies at a predetermined price and time in the future. Unlike spot trading, futures allow traders to potentially profit from downward price movement and can even be used to mitigate risk in your spot holdings by taking offsetting positions to protect your portfolio from adverse price action. Finally, futures contracts enable the implementation of sophisticated trading strategies, such as arbitrage, calendar spreads, and intermarket spreads, which are unavailable to spot traders.
While futures trading can be potentially beneficial for crypto traders, the use of leverage magnifies risks. As a result, traders will want to make use of all available metrics and indicators to make informed decisions before taking up any positions. In this article, we’ll equip you with the knowledge to identify and interpret the top metrics to successfully trade crypto futures.
Metrics for Analyzing Market Trends and Price Action
Moving Averages
Moving averages are an excellent way to smooth out the noise of daily price fluctuations and provide a clear picture of the underlying trend of a crypto asset. There are three main types of moving averages:
Simple Moving Average (SMA): The most basic type of moving average calculated by simply averaging the closing prices over a given period.
Exponential Moving Average (EMA): EMAs give more weight to recent price data, making them more responsive to current market trends.
Weighted Moving Average (WMA): WMAs assign different weights to each price point within the period, with more recent prices receiving higher weights.
How to Use Moving Averages When Trading
Identify the Trend: Plot a 20-day EMA on the chart of the crypto asset you're analyzing. If the price consistently stays above the 20-day EMA, it suggests a bullish trend. Conversely, if the price remains below the 20-day EMA, it indicates a bearish trend.
Watch for Trend Reversals: Pay close attention to instances where the price crosses the 20-day EMA. A break above the EMA with increasing volume could signal a potential shift from bearish to bullish. A break below the EMA with rising volume might suggest a change from bullish to bearish.
Identify Support and Resistance: Plot a longer-term moving average, such as the 200-day SMA. This can help identify key support and resistance levels. If the price bounces off the 200-day SMA multiple times during an uptrend, it indicates a strong support zone. Conversely, if the price is rejected multiple times at the 200-day SMA during a downtrend, it suggests a strong resistance zone.
Manage Risk: Use moving averages to set stop-loss orders. For example, in a long trade, you might place your stop-loss order below the 20-day EMA, helping to limit potential losses if the trend reverses.
MACD (Moving Average Convergence Divergence)
The MACD is a momentum indicator that shows the relationship between two moving averages of prices. It's calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result is the MACD line. A nine-day EMA of the MACD line, called the "signal line," is then plotted on top of the MACD line. Traders typically use the MACD to identify changes in trend, momentum, and potential buy or sell signals.
How to Use MACD When Trading
Identify Momentum Shifts: Observe the MACD histogram. If the price is making higher highs but the histogram is forming lower highs, it suggests weakening bullish momentum. Conversely, if the price is making lower lows but the histogram is forming higher lows, it indicates weakening bearish momentum. These divergences can be early warning signs of a potential trend reversal.
Confirm with Other Indicators: Don't rely solely on the MACD. Confirm your observations with other technical indicators. Look for declining volume, bearish/bullish divergence in the RSI, or price action patterns that support the MACD signals.
Take Action: If you see multiple signals aligning with the MACD divergence, consider taking action. In the case of weakening bullish momentum, you might close your long positions to secure profits or even open short positions to capitalize on the potential downward move. For weakening bearish momentum, you could close short positions or initiate long positions.
Bollinger Bands
Bollinger Bands measure price volatility and provide potential entry and exit points. They consist of three lines:
A middle band, which is a simple moving average (SMA) of the price (typically 20 periods).
An upper and lower band, which are standard deviations away from the middle band (typically 2 standard deviations).
Traders use Bollinger bands to identify potential breakouts, reversals, and overbought or oversold conditions.
How to Use Bollinger Bands When Trading
Monitor Volatility: Observe the width of the Bollinger Bands. Narrow bands indicate low volatility, while widening bands suggest increasing volatility and the potential for a significant price move.
Confirm with Other Indicators: Look for confirmation from other technical indicators. Increasing volume, overbought/oversold conditions in the RSI, or candlestick patterns can help confirm the signals from Bollinger Bands.
Identify Breakout Opportunities: A decisive break of the price above the upper Bollinger Band can signal a bullish breakout, while a break below the lower band may indicate a bearish breakout. These breakouts often occur after a period of consolidation or low volatility.
Enter Trades Strategically: Use breakout signals from Bollinger Bands to enter trades. In a bullish breakout, consider entering a long position with a stop-loss order placed just below the lower band. For a bearish breakout, consider entering a short position with a stop-loss order placed just above the upper band.
Manage Risk and Trail Stops: As the price moves in your favor, trail your stop-loss order to lock in profits and protect your gains. You can use the Bollinger Bands as a guide for trailing stops, adjusting your stop-loss to just below the lower band in long trades or just above the upper band in short trades.
Metrics for Analyzing Interest
Open Interest
Open interest refers to the total number of outstanding futures contracts that haven't been settled. It provides insights into the level of market participation and the potential for future price action. Rising open interest typically suggests increasing market activity and potential for further price movement, while declining open interest might indicate waning momentum.
On Flipster, each trading symbol has a maximum open interest limit. When this limit is reached, the system enters "reduce-only" mode, preventing users from placing orders that would increase the open interest beyond the limit, ensuring market stability and preventing excessive leverage. What this does is benefit traders by mitigating the risk of cascading liquidations that can occur when open interest becomes excessively high. By limiting open interest, Flipster helps to prevent a scenario where a large number of traders are forced to liquidate their positions simultaneously.
Read more about how Flipster handles open interest.
How to Use Open Interest When Trading
You're analyzing the futures market for Polkadot (DOT) and notice a gradual price increase accompanied by a steady rise in open interest.
Monitor Open Interest Trends: Observe the direction of open interest in conjunction with price action. Rising open interest alongside rising prices suggests a strengthening trend, with new money entering the market. Conversely, declining open interest while prices are rising could indicate a weakening trend, as existing participants may be exiting.
Interpret Changes in Open Interest: Analyze how open interest changes in relation to price movements. Increasing open interest with increasing prices is generally a bullish signal, while increasing open interest with decreasing prices can be a bearish signal.
Combine with Other Indicators: Use open interest in conjunction with other technical indicators, such as moving averages, RSI, MACD, and volume, to confirm your observations and improve the accuracy of your analysis.
Identify Potential Turning Points: Significant changes in open interest can sometimes precede major price reversals. A sudden drop in open interest after a prolonged trend could signal a potential trend reversal.
Metrics for Analyzing Market Sentiment
RSI (Relative Strength Index)
The RSI is a momentum oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. Traditionally, RSI readings of 70 or above indicate that a security is overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.
How to Use RSI When Trading
You're monitoring the futures chart for Ethereum (ETH) and notice that the price has been on a strong upward trend.
How to Use RSI When Trading
The RSI (Relative Strength Index) is a momentum oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. Here's a step-by-step guide on how to use the RSI effectively in your crypto trading:
Identify Overbought/Oversold Conditions: Monitor the RSI reading. Generally, a reading above 70 suggests that the asset may be overbought, while a reading below 30 indicates it may be oversold. These levels can signal potential trend reversals or pullbacks.
Exercise Caution at Extreme Levels: When the RSI approaches extreme levels (above 70 or below 30), be cautious about entering new positions in the direction of the prevailing trend. A pullback or reversal is more likely in overbought/oversold conditions.
Confirm with Other Indicators: Don't solely rely on the RSI. Look for confirmation from other technical indicators, such as the MACD, volume, or price action patterns. For example, if the RSI is showing overbought conditions, look for weakening momentum in the MACD or decreasing volume to confirm the signal.
Look for Divergence: Look for divergence between the RSI and price action. Bullish divergence (price makes lower lows, RSI forms higher lows) can signal a potential bullish reversal, while bearish divergence (price makes higher highs, RSI forms lower highs) can indicate a potential bearish reversal.
Adjust Your Trading Strategy: Use the RSI readings to inform your trading decisions. In overbought conditions, consider taking profits on existing long positions or tightening stop-loss orders. In oversold conditions, you might look for potential long entries with appropriate risk management.
Put/Call Ratio
The put/call ratio is a metric that compares the trading volumes of put options (bets on price decline) to call options (bets on price increase). It provides insights into market sentiment and potential trend reversals. A high put/call ratio suggests bearish sentiment, while a low ratio indicates bullish sentiment.
How to Use the Put/Call Ratio When Trading
Monitor the Put/Call Ratio: Track the put/call ratio for the crypto asset you're interested in. A rising ratio suggests increasing bearish sentiment, as more traders are buying put options (bets on price decline). A falling ratio indicates increasing bullish sentiment.
Interpret Sentiment Shifts: Use the put/call ratio to gauge potential trend reversals or continuations. A high put/call ratio can signal a potential bearish reversal, while a low ratio may indicate a potential bullish reversal.
Confirm with Other Indicators: Combine the put/call ratio with other technical and fundamental indicators to confirm your observations. Look for declining open interest, negative funding rates, or weakening on-chain metrics to support bearish signals from the put/call ratio.
Adjust Your Trading Strategy: Use the put/call ratio to inform your trading decisions. If the ratio is showing extreme bearish sentiment, you might consider tightening stop-loss orders on long positions or even exploring short-selling opportunities.
Long/Short Positions Ratio
The long/short positions ratio compares the number of traders holding long positions (bets on price increase) to those holding short positions (bets on price decrease). It provides insights into market sentiment and potential trend shifts. Extreme readings in this ratio can signal overextended markets and potential trend reversals.
How to Use the Long/Short Positions Ratio When Trading
Identify Extremes: Monitor the long/short positions ratio. An extremely high ratio indicates excessive bullishness and a potential correction. Conversely, an extremely low ratio suggests excessive bearishness, which could precede a bullish reversal.
Think Contrarian: When the majority of traders are overly bullish, exercise caution or consider a contrarian short position. Similarly, excessive bearishness could present a long opportunity.
Analyze Funding Rates and Liquidations: High funding rates and increasing liquidations of long positions can further support a contrarian bearish view when the long/short ratio is extremely high. The opposite is true for excessively bearish sentiment.
Consider Context: An extremely high ratio might carry more weight during periods of high volatility or after a rapid upward price move.
Adjust Positions: If you observe excessive bullishness, consider reducing long exposure or opening a short position. Conversely, if excessive bearishness is prevalent, you might increase long positions or cover shorts.
Metrics for Analyzing Liquidation and Funding Rate Analysis
These metrics provide a unique perspective on market dynamics by revealing the behavior and positioning of leveraged traders. By understanding how liquidations and funding rates work, you can anticipate potential trend shifts and make more informed trading decisions.
Liquidation Data
Liquidation data essentially tracks when traders in the futures market are forced to close their positions due to insufficient margin to cover their losses. Such data is useful for short-term traders and scalpers looking to pinpoint quick shifts in momentum, and is useful for traders executing contraction strategies or engaged in volatility trading.
For contrarian traders, a spike in liquidations can signal an overextended market ripe for a reversal, allowing them to potentially enter against the crowd. Meanwhile, volatility traders can use liquidation data to identify periods of heightened price swings and capitalize on the increased trading opportunities that often accompany such volatility.
How to Use Liquidation Data When Trading
Monitor for Spikes: Keep an eye out for sudden spikes in liquidation volume, especially during periods of high volatility. This can indicate a potential trend exhaustion or reversal.
Analyze Liquidation Direction: Pay attention to whether long or short positions are being liquidated. A surge in long liquidations during an uptrend might suggest weakening momentum, while a spike in short liquidations could indicate a potential bottom.
Look for Confirmation: Use other indicators like RSI divergence or changes in trading volume to confirm potential reversals signaled by liquidation data.
Consider Contrarian Trades: If you observe a large liquidation event and see confirming signals, consider entering a contrarian trade in the opposite direction of the liquidations.
Identify Volatility Opportunities: Monitor liquidation data to spot periods of heightened volatility, which can create increased trading opportunities for those comfortable with higher risk.
Funding Rate
The funding rate is a periodic payment mechanism used in perpetual futures contracts to keep their price aligned with the underlying spot market. It's a payment exchanged between long and short position holders, with the direction of the payment depending on the difference between the perpetual futures price and the spot price. Here’s how it works:
Futures price higher than spot? Longs pay the shorts, incentivizing selling futures and buying the asset on the spot market, bringing the prices closer.
Futures price lower than spot? Shorts pay the longs, encouraging the buying of futures and selling the asset on the spot market, again nudging the prices towards equilibrium.
Flipster funding rate formula incorporates the interest rate difference between the trading pair and a "premium index" that measures the perpetual swap's deviation from the spot price. A dual approach ensures accurate pricing and minimizes discrepancies between the perpetual swap and spot markets, promoting market efficiency and fair trading.
Learn more about Flipster’s funding mechanism.
How to Use the Funding Rate When Trading
Track the trend: Regularly monitor the funding rate for your chosen perpetual futures contract. Is it positive or negative? Is it increasing or decreasing?
Interpret the signals: A consistently high positive funding rate often signals an overheated market where longs are paying a premium to maintain their positions. This could suggest a potential price correction. Conversely, a very low or negative funding rate might indicate excessive bearishness, potentially presenting a contrarian long opportunity.
Consider your actions:
High positive funding rate? Consider reducing your long exposure, tightening stop-loss orders, or even opening a short position to capitalize on a potential downward move.
Low or negative funding rate? This might be a good time to increase your long positions or cover your short positions, anticipating a potential upward swing.
Trade on Flipster
Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.