Futures Trading Guide

Take your Cryptocurrency investment to the next level with futures trading

How to maximize your investment with AAX's futures contracts

Futures Historical Data

Futures Historical Data

A beginner's guide to futures trading

Why invest in cryptocurrency futures?

If you have a view on the market but lack capital, investing in futures is the best way for you lock up handsome profit. Reward yourself by staying true to your beliefs and achieve more with less.


AAX understands users wants to maintain the biggest flexibility with their digital currency investment. To help users be agile and prepared for any market environment AAX offers futures contracts with up to 100x leverage and has no expiry.

Let's look at how it works.

Overview

Similar to spot trading, traders post on the order book at what price they want to buy or sell. The major difference is they can make use of leverage and need to decide on whether to go long or short.

Leverage on AAX can be up to 100x, traders can decide on how much leverage they want to use depending on their investment strategy.

In the futures market, traders are able to profit from both betting for and against the market. By acquiring long contracts on an asset indicates a trader is confident the value of an asset isgoing to increase. Traders can also bet against the market by going short, if he or she anticipates the value of the asset is going to drop.

Futures contracts allow traders to hedge the market by having an offsetting number of futures contracts. When there is a gain from the futures contract, there is always a loss from the spot market, or vice versa. With such a gain and loss offsetting each other, the hedging effectively locks in the acceptable, current market price.

Trader can exit the market by closing the position. When the position is closed the Profit and Loss (PnL) will be realized. Closing a position is achieved by taking a trade in the opposite direction of existing position.

Calculating PnL on futures

The average price at which a trader enters the futures market is the entry price. The profit and loss of the position is realized when the trader places a contra order and partially or fully closing the position. This is known as the realized profit and lost (PnL).

For an inverse futures contract like BTCUSD which the settlement currency is BTC, if a trader goes long of 1000 contracts for BTC at Price = 3000 (entry price), then close out 600 at Price = 4000 (market price), realised PnL = 600*(1/3000-1/4000) = 0.05 BTC (profit), with a long exposure of 400 contracts.

Depending on the leverage the trader choose to have, a liquidation price is determined. The higher the leverage, the liquidation price will be closer to the entry price. We will explain more on how liquidation works on AAX in the section below.

How to maximize your investment with AAX's futures contracts

No expiry

The futures contracts of AAX are perpetual contracts meaning they do not have an expiry date. Because of this feature, AAX futures contracts auto-roll every 8-hours with a funding rate mechanism paid between Long and Short positions to anchor the price to the spot rate in order for traders to maintain their positions.

Funding rate - Premium

Let's learn about Premium first. Futures trading price in AAX (AAX price) may differ from the spot market (index price) due to differences in market forces. As a result, traders in both long and short positions have to be compensated due to the actual market prices in the spot market. In this case, AAX futures contracts auto-roll every 8-hours depending on the AAX price and index price at the time. Premium is calculated on the unrealised PnL because the trader has not closed the position. The unrealised PnL represents the trader's position at the time the rollover takes place.


Funding rate - Interest

Now onto interest, by getting a long position in e.g. BTCUSD is equivalent to a trader borrowing USD to buy BTC in the spot market (vice versa if in short position). Due to the fact that the borrowing cost of BTC the base currency is much higher than USD the quote currency, it will be a no brainer for all traders to go long to take advantage of the lower interest rate to borrow USD to buy BTC.

In order to maintain a balanced supply of long and short futures contracts, AAX's futures contracts auto roll-over every eight hours to make the traders in short BTC position to pay to those in long BTC position. This is known as Interest.

Every contract traded on AAX consists of two instruments: a Base currency and a Quote currency.

Take BTCUSD as an example, assuming BTC rate = 0.025% (per day), USDT rate = 0.001% (per day), funding_period = 3 (8 hours , 3 times a day)


Delta_Interest= (Quote Currency Rate - Base Currency Rate) / funding_period
= (0.001% - 0.025%) / 3
= - 0.008%


Funding takes into account of the differences between AAX futures prices and spot prices (Premium), and the differences in interest rate so that either the long position traders pay to the short position traders or vice versa, depending on market conditions.




Now the biggest concern for traders is whether they need to pay or is eligible to receive interest. Simply put, when the Funding is positive, longs pay shorts. When it is negative, shorts pay longs.

For example A trader has long position of 10000 contracts. AAX price = 4000 and Index price = 4100. Interest rate difference = - 0.008%


Rate payable by long trader = 10000 x ( (1-0.00008) / 4100 - 1 / 4000 ) = - 0.061 BTC

Long trader should receive 0.0061 BTC in this funding interval.

AAX does not charge any fees on funding; it is exchanged directly peer-to-peer.

Leverage

Essentially, traders on AAX are able to gain a 100X risk exposure at maximum with X amount of capital.

For example a client enters 1000 contracts of BTCUSD, at price 4000. The notional value in BTC is 1000 / 4000 = 0.25 BTC. With a 10x leverage, the trader will only need to deposit 0.25 / 10 BTC = 0.025 BTC to maintain the position.

How AAX handles liquidation

Being liquidated

For example, a trader takes on 100x leverage and goes long 1 contract at $100.00 with an initial margin of $1.00 and the maintenance margin is set at 0.5%. In this case the liquidation price is $99.5 and bankruptcy price is $99.0, without taking commission into account.

When the marked price in AAX futures contract goes down to $99.50, the trader position is liquidated by a market sell order.

If the liquidation order is filled at $99.40 due to the use of market order, the remaining margin of $0.40 will go to AAX's Default Fund.

AAX's Default Fund is here to help

Bankruptcy price is $99.00 since the maintenance margin is $1. However in a weak market, the value of asset can drop below the bankruptcy price, in this case, the Default Fund will pick up the loss. If the liquidation order is filled at $98.90, the price risk of liquidation is taken up by AAX default fund, meaning the default fund will take up the loss of $0.10.

Currently, AAX does not impose auto-deleveraging to ensure a fair trading venue to all clients which means a client being liquidated has no impact to others.

As expected, traders with a lower leverage will be less vulnerable to be liquidated. For example, a trader takes on 10x leverage and goes long 1 contract at $100.00 with a margin of $10.00 and the maintenance margin is set at 0.5%.In this case liquidation price is $90.5 and bankruptcy price is at $90.0.

The above example demonstrates in principle how AAX handles liquidation, actual figures on marked price, liquidation price and bankruptcy price is subjected to the investment strategy of individuals.