Our site is most well known for its informative technical guide to understanding futures contracts and how they are traded in bitcoin exchanges. What we don't focus as much on is profit-making strategies in trading bitcoin futures.
The most important principle is of course supply and demand. All else equal:
- higher demand -> price up,
- higher supply -> price down,
- lower demand -> price down,
- lower supply -> price up
The question is, with all the variables that are in play, what wins out? The factors that are raising demand vs. lowering demand vs. raising supply vs. lowering supply. It's a big puzzle that you have to figure out yourself by using a model to determine what the dominant factors are and the net effect between them all.
There's three main profit-strategies you can do when trading:
1. Arbitrage - exploiting price differences between exchanges. This includes for example if you're buying and selling between Bitfinex and Bitstamp or you are buying on spot and selling over-the-counter at 10% premium. The name of the game is increasing efficiency in the market by making full-loop arbitrage plays that make it so you can pocket the difference of BTC/USD on two different exchanges. The question is, will fees and volatility in the time you have to transfer between exchanges be too high to let you profit?
2. Technical Analysis - "The trend is your friend", "head and shoulders", "double bottom" -- these are the cries of TA traders who use often esoteric charting techniques to come up with ideas for positions. There are countless indicators that serve varying degrees of usefulness to traders. Some will swear by using MACD, others will insist that Stochastic RSI is the most important. Moving average crosses are also common, such as the "death cross" which even legacy market traders use. The art of charting will never go away in any market, and bitcoin traders are very fond of their tools and predictions on where price will go based purely on their chart techniques.
3. Fundamental Analysis - These are trade ideas and position entries based on real news and information that affects bitcoin development or the ecosystem that would lead people to be more willing to buy (higher demand) or sell (higher supply). Here's a list of events that would trigger someone to formulate a trade strategy based on fundamental info:
- Exchange hacks,
- Hard fork drama,
- Protocol development news,
- Spam attacks,
- Bank announcing investment/interest in bitcoin
No matter what strategy you use, risk management in your trade is paramount. You have to make sure your leverage is not too high, or that the amount you are using to trade with is not too much of a proportion of your portfolio if you're at high leverage.
If you're not careful, trading ends up becoming like gambling. If you go into it with NO strategy whatsoever, no arbitrage play or no technical indicator reasoning, or no fundamental reasoning -- then you are just gambling. When you have very high leverage to trade futures, it can feel a lot like a slot machine or a roulette where you just put down an amount of money and see how it goes.
What differentiates trading from gambling is that you are handling financial instruments for investment returns with proper risk management. Gambling is reckless and should be seen instead as entertainment, not a serious way to make money over time. There are gray areas like Poker, but the idea is the same: risk management.