Those new to investing might think that professional traders spend the majority of their time staring at screens day and night in order to analyze the markets and pick the best trades but this could not be farther away from the truth.
Having a good eye isn’t what differentiates top traders from average ones, it’s the application of tried and tested strategies that give pro traders the ability to stay net positive over long periods of time. Today we will discuss how the futures carry trade, funding rate, and use of trailing stops are used by top traders.
Each of these simple strategies do not involve proprietary trading bots or a substantial margin deposit, meaning an investor does not need a massive trading balance to generate profits.
Non-directional strategies
The crypto markets are known for their whipsaw price action which involves many assets rising or falling by double to triple digits within a 1 hour to 24 hour period.
Investors are drawn to the possibility of capturing stellar returns so it might sound crazy to suggest seeking just a 2% monthly gain on cryptocurrencies.
Why would an investor engage in such a ‘low yield’ strategy? The answer is compound interest. If a trader can achieve 2% per month, their yearly gain equals 27%.
Few traders would be able to match this return consistently by trying to guess market tops and bottoms. Thus, having more reliable gains relieves one from the stress of potential losses and the almost impossible task of trying to time the market.
One great strategy called the carry trade consists of buying a cryptocurrency on traditional markets and selling its fixed-month calendar futures.
This rate can be measured by analyzing the basis indicator, a metric also referred to as the futures markets annualized premium.
This is not a permanent trade as the basis indicator oscillates depending on how bullish investors are. Usually, there is a stronger opportunity in altcoins as there is less competition for those.
Viewing the chart above, take notice of how Ether’s (ETH) basis touched the 20% annualized level in mid-August. But, there’s a catch.
The devil always lies in the details, and this is one of those cases. This trade will only work if the cryptocurrency deposited as margin is the same one being shorted via futures. Some derivatives exchanges will only let you deposit Bitcoin (BTC) or Tether (USDT) as collateral.
One important thing investors must remember is that unlike perpetual futures (inverse swaps), fixed-calendar futures contracts have a set expiry date. Hence, one needs to sell the spot position at the moment of futures contract liquidation.
Trade the funding rate
Other non-directional trades include options strategies which usually involve multiple expiries and futures contracts.
One example, which is less risky is to exploit and trade the funding rate. Perpetual contracts (inverse swaps) will charge either longs or shorts, depending on the leverage imbalance. Those exchanges inform an estimate for the next funding window, usually every 8 hours.
When this rate goes up, professional traders will short futures contracts and simultaneously buy it on spot exchanges. Thus, their risk is fully hedged, collecting the funding rate and reverting the trade right afterward.
Automated trading equals success
Sometimes, in the market there are not many risk averse trading strategies available. In situations like these, even professional traders might consider taking a directional risk. What sets them apart from novice traders is the use of automated trading.
Most traders know how to use stop-loss, which’s a good thing, but that’s not what creates winning opportunities. The same tool can be used to initiate trades, especially if using a trailing stop.
In the above example, this trailing stop buy (long) has an activation price of $12,900. Thus, while the market remains trading above that level, this order remains dormant.
Once Bitcoin reaches that level, it will only buy after a 0.8% bounce (callback rate). Hence, it will automatically buy as soon as Bitcoin rises $103 from its lows.
This strategy is one that is frequently used by professional traders to automate their investing process and it significantly reduces the need to check prices 24-hours a day.
Practice and master those three strategies: futures carry trade, profiting from the funding rate, and buying using trailing stops. Focus on learning non-directional trading and options strategies and free yourself from guessing market tops and bottoms.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
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