3 strategies for futures traders to utilize leverage and prevent liquidation losses

Periodically, news headlines emerge reporting liquidations of Bitcoin (BTC) and crypto futures contracts worth $100 million or more, leading inexperienced investors and non-expert analysts to attribute the issue to excessive leverage utilized by retail traders.


The majority of these high-risk wagers can be attributed to speculators, particularly when the liquidations are concentrated on retail-focused exchanges like Bybit and Binance. Nevertheless, not every futures liquidation stems from irresponsible leveraging.
Various trading strategies employed by professionals may also result in liquidations during sudden and drastic price fluctuations, but these instances do not necessarily equate to losses or an indication of reckless leveraging. The Chicago Mercantile Exchange (CME), OKX, and Deribit typically demonstrate a lower liquidation ratio compared to exchanges catering to retail traders, suggesting that these traders often employ more sophisticated tactics.
Engaging in futures markets, especially through perpetual contracts (inverse swaps), is relatively straightforward. Nearly all crypto exchanges provide leverage of 20x or higher, requiring only an initial margin deposit. However, unlike traditional spot trading, futures contracts cannot be withdrawn from the exchange. While these leveraged futures contracts are synthetic in nature, they allow investors the opportunity to speculate on price declines.
These derivative instruments offer unique advantages and can enhance a trader’s performance, but those who become excessively confident often struggle to sustain profitability in the medium to long term. To avoid succumbing to this mindset, seasoned traders typically utilize three distinct strategies aimed at optimizing profits without relying solely on directional trades.
1. Forced liquidations on low-liquidity pairs
Sophisticated traders exploit futures contracts on low-liquidity pairs to capitalize on volatile markets. By opening highly leveraged positions and foreseeing forced liquidations due to inadequate margins, they instigate a domino effect that influences the market in their favor. This tactic requires significant capital and multiple accounts, effectively harnessing market dynamics to generate a substantial impact.
2. Cash and carry trading
The cash and carry trade entails buying an asset in the spot market while simultaneously selling a futures contract on the same asset. This strategy locks in the price differential between spot and futures prices, allowing traders to profit from the convergence of these prices at contract maturity. Recognized for its low-risk nature, this arbitrage approach exploits pricing inefficiencies between markets and thrives in stable market conditions, making it a preferred choice for risk-averse investors.
3. Funding rate arbitrage
Perpetual contracts charge funding rates every eight hours to balance leverage demand among buyers and sellers. Market makers and arbitrage desks leverage this by opening leveraged positions and hedging them through spot market transactions. By capitalizing on discrepancies in rates across markets, this strategy known as funding rate arbitrage necessitates vigilant monitoring and precise execution to maximize profits while managing risks effectively.
Effectively utilizing derivatives calls for expertise, experience, and a substantial capital buffer to weather market turbulence. Nonetheless, strategies like funding rate arbitrage can prove fruitful even in subdued market environments with minimal price fluctuations. These methodologies exemplify the prudent use of leverage to optimize gains under varying market conditions.
This article serves as general information and should not be construed as legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect the perspectives of Cointelegraph.