Ultimate Guide for Different Crypto Position Modes

There is no doubt that crypto trading or digital assets trading is already dominating the Tradefi landscape and so it is pertinent for every person living in this Gen-Z era know the various Cryptocurrency position mode because it has become a dynamic and increasingly popular arena, attracting millions of users worldwide. 

One of the crucial components of successful trading is understanding the different position modes available. Position modes determine how you manage your trades, risk, and ultimately, your profits. In this ultimate guide, we will explore various crypto position modes, their advantages, disadvantages, and strategies for effectively utilizing them.

What are Crypto Position Modes?

Position modes in cryptocurrency trading refer to the different ways you can manage your open positions in the market. These modes are vital for risk management and can significantly impact your trading performance. 

Now for a novice in cryptocurrency trading such may think it doesn’t matter giving attention to position size but experienced trader knows how integral position size is in crypto The two primary position modes are:

1. One-Way Mode
2. Hedge Mode

Additionally, we will touch on other advanced modes that some trading platforms offer, such as Cross Margin and Isolated Margin modes. Let’s dive deeper into each of these modes, their mechanics, and their applications.

One-Way Mode

In One-Way Mode, also known as single-direction mode, traders can hold only one position per trading pair. This means you can either have a long position (buy) or a short position (sell) on a particular asset but not both simultaneously if you try to open two position the order will cancel itself.

This mode is straightforward and is often preferred by beginner traders due to its simplicity in nature. Now in this type of position size you don’t need to worry about checking your position every second because its just one position opened for you and in other for you to open another position you need to close the previous position first.

Advantages of One-Way Mode

One-Way Mode is very easy to understand and manage, making it ideal for novice traders. Due to its simplicity, one-way mode offers clear strategy since you can only hold one position at a time, it forces you to have a clear trading strategy and direction. It also lowers risk of over-leveraging With only one position allowed, the risk of over-leveraging and accumulating excessive positions is reduced.

Disadvantages of One-Way Mode

In one-way mode position size you cannot simultaneously hedge your positions, limiting your ability to manage risk dynamically. There are instances of missed opportunities in volatile markets, the inability to hold both long and short positions simultaneously can result in missed trading opportunities.

Strategies for One-Way Mode

Trend Following: Trend following is a trading strategy used to capitalize on the momentum of an asset’s price movement. It involves identifying and entering trades in the direction of the prevailing trend, whether upward or downward, and holding those positions until the trend shows signs of reversal. 

This strategy is rooted in the belief that prices are more likely to continue moving in the direction of the current trend than to reverse.

In One-Way Mode, it’s effective to follow the trend. If the market is bullish, you hold long positions; if bearish, you hold short positions.

Stop-Loss and Take-Profit Orders: As stated in our previous article use stop-loss and take-profit orders to manage risk and secure profits. Some of the order types are explained further below:

A limit order is a type of order that is placed on the order book with a specific limit price. When you place a limit order, the trade will only be executed if the market price reaches your limit price (or better). You can use limit orders to buy at a lower price or to sell at a higher price than the current market price.

Meanwhile, a market order is an order to buy or sell at the best available current price. It is also called Mark order. As a trader when placing a market order, you will pay fees as a market taker.

The common way to understand a stop-limit order is to break it down into its stop price and limit price. The stop price is the price that triggers the limit order, and the limit price is the limit price of the triggered limit order. This means that once your stop price has been reached, your limit order will be immediately placed on the order book.

The same goes for a stop-limit order, a stop market order uses a stop price as a trigger. However, when the stop price is reached, it triggers a market order instead.

A take-profit limit order is similar to a stop-limit order. It has to do with a trigger price too, the price that triggers the order, and a limit price, the price of the limit order that is then added to the order book. The key difference between a stop-limit order and a take-profit limit order is that a take-profit limit order can only be used to reduce open positions. 

A take-profit limit order can be a useful tool to manage risk and lock in profit at specified price levels. It can also be used simultaneously with other order types, such as stop-limit orders, allowing you to have more control over your positions.

Similar to a take-profit limit order, a take-profit market order uses a stop price as a trigger. Moreover, when the stop price is reached, it triggers a market order instead. You can set a take-profit market order under the Stop Market option in the order entry field.

A trailing stop order in the other hand, helps you lock in on your profits while limiting the potential losses on your open positions. For a long position, this means that the trailing stop will move up with the price if the price goes up.

However, if the price moves down, the trailing stop stops moving. If the price moves a specific percentage (called the callback rate) in the other direction, a sell order is triggered. The same is true for a short position but in reverse. The trailing stop moves down with the market but stops moving if the market starts going up. If the price moves a specific percentage in the other direction, a buy order is issued.

The activation price is the price that triggers the trailing stop order. If you don’t specify the activation price, this will default to the current Last price or mark price. You can set which price it should use as a trigger at the bottom of the order entry field. 

The callback rate is what chooses the percentage amount the trailing stop will “trail” the price. So, if you set the callback rate to 1%, the trailing stop will keep following the price from a 1% distance if the trade is going in your direction. If the price moves more than 1% in the opposite direction of your trade, a buy or sell order is issued (depending on the direction of your trade).

Technical Analysis: You need to have little knowledge and also rely on technical analysis to determine entry and exit points. Indicators like Moving Averages (MA), Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD) helps very well in terms overbought or oversold situation of an asset which you can use to identify exit and entry point.

Example: For Instance you believe that Bitcoin ($BTC) is in a bullish trend. In One-Way Mode, you open a long position on $BTC. As the price increases, you set a stop-loss order below your entry point to limit potential losses and a take-profit order at a higher level to secure profits.

 This way, you manage your risk while capitalizing on the upward trend. By so doing if $BTC should hit the Take profit zone the order will be triggered with or without your attention.

Hedge Mode

Now don’t get confuse between Hedge Mode and Dollar-Cost-Average (DCA). Hedge mode which is also known as dual-direction mode, allows traders to hold both long and short positions simultaneously on the same trading pair. 

This mode is more advanced and is often used by experienced traders to manage risk and take advantage of market fluctuations.

In Hedge mode, you can hold long and short positions for a single contract at the same time. A trader may do this if they’re bullish on an asset long-term but bearish in the short term. With Hedge mode, your quick short positions won’t affect your long positions.

In Bitunix, The default position mode is the One-Way mode. This means you can’t open both long and short positions at the same time for a single contract. If you tried to do so, the positions would cancel each other out.

Hedge mode position size enables you to hedge your positions, reducing overall risk exposure. Hedge mode is also flexible giving a trader the opportunity to can capitalize on both upward and downward market movements simultaneously. Due to the way Hedge mode is sophisticated, exchanges like Bitunix offers advanced strategies to better make informed decisions on your trades such as arbitrage and spread trading.

Hedge Mode is more complex and requires a deeper understanding of market dynamics and risk management. It also has higher margin requirements for holding multiple positions which can increase the potential for margin calls. Hedge mode position size leads to over-trading due to the ability to open multiple positions which can erode profits due to increased transaction costs.

Strategies for Hedge Mode

Hedging: Open a long and a short position simultaneously to hedge against market volatility. For example, if you are uncertain about the market direction, you can hold both positions to minimize potential losses.

Arbitrage: Take advantage of price discrepancies between different exchanges or markets by holding offsetting positions. Arbitrage trading is aimed to profit from the price differences by buying the crypto at a lower price in one market and simultaneously selling it at a higher price in another market.

Initially, this trading scheme started with traditional assets, but it has become prevalent in the global crypto markets because cryptocurrencies are traded across several exchanges and countries worldwide. This makes cryptocurrencies potentially lucrative for arbitrage and allows traders to benefit from price discrepancies across these exchanges.

Spread Trading: Profit from the price difference between two related assets. For instance, you can go long on Ethereum (ETH) and short on a related asset like Ethereum Classic (ETC). This strategy allows traders to potentially profit from the price difference between the two securities, rather than relying solely on the direction of the overall market. By taking advantage of price discrepancies between related securities, spread trading can provide a way to hedge risk and generate returns in various market conditions.

Let me give you a good illustration. Imagine you are trading Ethereum ($ETH) and you anticipate short-term volatility but expect the price to rise in the long term. In Hedge Mode, you can open a long position on $ETH to benefit from the expected price increase. Simultaneously, you can open a short position to protect against potential short-term price drops. This way, you are hedging your long-term position while still being able to take advantage of short-term price movements.

Advanced Position Modes

We have look into the basic One-Way and Hedge Modes, some trading platforms like Bitunix offer advanced position modes like Cross Margin and Isolated Margin modes. These modes add another layer of risk management and flexibility to your trading strategy.

Cross Margin Mode

Introduced in the late 1980s when the rise of financial instruments met increased market volatility the use of cross margining increases a firm’s liquidity and financing flexibility through reduced margin requirements and lower net settlements. It also prevents unnecessary liquidation of positions and therefore potential losses.

As discussed in our previous article, In Cross Margin Mode, the entire margin balance in your trading account is shared among all open positions. This means that the available balance in your account can be used to prevent margin calls on any position.

Advantages of Cross Margin Mode

Cross mode margin uses all available funds in your account as margin, potentially preventing margin calls during volatile market conditions. This mode also reduces the risk of liquidation because the shared margin can help prevent the liquidation of individual positions.

Disadvantages of Cross Margin Mode

Cross-margin mode has higher risk since all positions share the same margin, losses from one position can affect the entire account balance. It is very complex because managing multiple positions with a shared margin requires careful monitoring.

Strategies for Cross Margin Mode

Use cross margin mode to diversify your positions across multiple assets, reducing the risk associated with a single asset. You should also actively monitor your positions and overall account balance to manage risk effectively.

In Isolated Margin Mode, each position has a separate margin balance. This means that the margin allocated to one position is independent of the margin allocated to other positions. Isolated margin mode works greatly for novice traders who have little knowledge on crypto trading.

One thing that is so profound in isolated margin mode is losses in one position do not affect the margin of other positions containing the risk to individual trades and it is way easier to manage because it is simple as each position is isolated

Each position has its own margin, so if one position underperforms, it may result in a margin call or liquidation without affecting other positions. limited use of funds are compartmentalized, which can limit the flexibility of using the total account balance.

You need to use specific risk management for isolated margin mode in other to come up with strategies to different positions. Focus on specific trades with clear entry and exit points, managing each position independently.

Factors to Consider When Choosing the Right Position Mode

Your experience level is very keen in choosing the right position mode. Newbie traders may find One-Way Mode easier to manage, while experienced traders might prefer the flexibility of Hedge Mode. In volatile markets, hedge mode can be beneficial for managing risk, whereas One-Way Mode might be more suitable in trending markets. 

As traders we should be able to know our risk tolerance as that can also influence our choices. Hedge Mode allows for more dynamic risk management, which can be advantageous if you are comfortable with complex strategies.

Transitioning Between Modes

Most trading platforms like Bitunix allow you to switch between One-Way and Hedge Mode. It’s essential to understand the implications of changing modes, as this can affect your open positions and overall trading strategy. Always ensure you have a clear plan before transitioning between modes.

Practical Tips for Effective Position Management

Risk Management

Regardless of the position mode you choose, risk management is crucial. Here are some tips for effective risk management:

Use Stop-Loss Orders: Always set stop-loss orders to limit potential losses.

Diversify Your Portfolio: Avoid putting all your capital into a single position. Diversify across different assets and markets.

Monitor Leverage: Be cautious with leverage, as it can amplify both profits and losses. Bitunix futures allow you to manually adjust the leverage of each contract. To choose a specific contract, go to the extreme top left of the page and skim through the current contract (BTC/USDT by default)

In Bitunix to adjust the leverage, go to the [Order Entry] section field and click on your current leverage amount (20x by default). You can also specify the amount of leverage by adjusting the slider, or by typing it in, and clicking on [Confirm].

Know that the larger the position size is, the smaller the amount of leverage is that you can use. Similarly, the smaller the position size, the larger the leverage you can use. Using higher leverage also carries a higher degree of risk of liquidation. 

As always, every trader should carefully consider the amount of leverage that they use and its associated risk.

Technical Analysis Tools

Utilize technical analysis tools to improve your trading strategy. Some commonly used tools include:

• Moving Averages (MA): Identify trends and potential reversal points.
• Relative Strength Index (RSI): Determine overbought or oversold conditions.
• MACD (Moving Average Convergence Divergence): Identify changes in momentum and trend direction.
• Bollinger Bands: Assess market volatility and potential breakout points.

Psychological Factors

Trading psychology plays a significant role in your success. Here are some psychological factors to consider:

Discipline: Stick to your trading plan and avoid impulsive decisions.

Emotional Control: Manage your emotions, particularly fear and greed, which can lead to poor decision-making.

Patience: Wait for the right opportunities rather than forcing trades.

Practical Application and Case Studies

To better understand how to apply different position modes, let’s explore some practical illustrations

Example 1: One-Way Mode in a Bullish Market

You are trading Bitcoin (BTC) and observe a strong bullish trend driven by positive market sentiment and institutional adoption.

Strategy:

1. Entry: You decide to open a long position on BTC at $65,000.
2. Stop-Loss: Set a stop-loss order at $63,000 to limit potential losses.
3. Take-Profit: Set a take-profit order at $70,000 to secure your profits.

Outcome: The market continues its upward trend, and BTC reaches your take-profit level at $70,000. You exit the position with a significant profit while your risk was managed by the stop-loss order.

Example 2: Hedge Mode in a Volatile Market

You are trading Ethereum (ETH) and expect short-term volatility due to an upcoming major update, but you believe in the long-term potential of ETH.

Strategy

1. Long Position: Open a long position on ETH at $3,500, anticipating long-term growth.
2. Short Position: Simultaneously open a short position on ETH at $3,000 to hedge against short-term volatility.
3. Stop-Loss and Take-Profit: Set appropriate stop-loss and take-profit orders for both positions.

Outcome: The market experiences short-term volatility, but your short position helps mitigate potential losses. Eventually, the long-term bullish trend prevails, and your long position profits significantly. The hedge position served its purpose by reducing risk during volatile periods.

Example 3: Cross Margin Mode for Diversified Portfolio

You have a diversified portfolio and want to maximize the use of your capital across multiple assets.

Strategy: Open multiple positions across different assets like BTC, ETH, and XRP using cross margin mode. You have to regularly monitor your positions and overall account balance to manage risk effectively. Also reallocate margin as needed based on market conditions and performance of individual positions.

Outcome: By using cross margin mode, you are able to prevent margin calls and liquidation during market downturns. Your diversified portfolio performs well overall, and you are able to capitalize on various market opportunities

Summary

Cryptocurrency trading has come to stay so the need for us to understand and effectively utilized different crypto position modes is a critical component of successful trading. 

One-Way Mode offers simplicity and clarity, making it ideal for beginners and novice traders, while Hedge Mode provides flexibility and advanced risk management capabilities for experienced traders. Cross Margin and Isolated Margin modes offer additional tools for sophisticated risk management and capital utilization.

By choosing the right mode based on your experience level, market conditions, and risk tolerance, you can enhance your trading performance and achieve your financial goals. Remember, no matter which position mode you choose, risk management, technical analysis, and psychological discipline are essential for long-term success in the cryptocurrency market. Stay informed, stay disciplined, and happy trading! From Bitunix

Glossary of Key Terms

Long Position: A long position refers to buying an asset with the expectation that its price will rise. Traders profit from the price increase when they sell the asset. Most traders prefer the word buy to long.

Short Position: A short position involves selling an asset you do not own, with the intention of buying it back later at a lower price. Traders profit from the price decline.

Leverage: Leverage allows traders to control a larger position with a smaller amount of capital. While it can amplify profits, it also increases the risk of significant losses.

Stop-Loss Order: A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price, limiting the trader’s loss on a position.

Take-Profit Order: A take-profit order is an order to sell a security when it reaches a specified price, securing the trader’s profit on a position.

Margin: Margin is the collateral that a trader must deposit to open and maintain a leveraged position. It acts as a security for the broker in case the trader incurs losses.

Arbitrage: Arbitrage involves taking advantage of price differences between markets by simultaneously buying and selling an asset to profit from the discrepancy. It involves comparing the price of a certain asset in a particular exchange as regards the exchange you use in other to for you to take advantage of the price difference.

Spread Trading: Spread trading involves taking opposing positions in two related assets to profit from the difference in their price movements.

Volatility: Volatility refers to the degree of variation in the price of an asset over time. High volatility means the asset’s price can change rapidly and unpredictably. Memecoins or shitcoins are mostly volatile.

Technical Analysis: Technical analysis involves using historical price data and chart patterns to predict future price movements and make trading decisions.

By following this ultimate guide, you’ll be better equipped to navigate the complexities of cryptocurrency trading and make informed decisions about your position modes. 

Whether you choose One-Way Mode, Hedge Mode, Cross Margin, or Isolated Margin, understanding the whole thing can help you manage risk, maximize profits, and achieve long-term success in the competitive world of crypto trading.