Understanding Price Reference Formats in Futures Trading -

When dealing with futures contracts, it’s essential to have the underlying assets’ price references. For instance, when trading Bitcoin futures, it’s necessary to compare the buying and selling prices with the price of Bitcoin on the Spot market. Exchanges offering futures trading typically display three types of reference prices:

Last Price: the most recent market price on the exchange. This reference can be quite volatile, with potential price spikes and significant fluctuations. These spikes can occur due to order execution errors, system glitches, or even intentional actions by market players, leading to forced liquidations if the portfolio isn’t well managed.

Mark Price: usually compared with the price of the futures contract on other exchanges, including funding data. Mark price tends to be more stable compared to the last price. Not all exchanges experience the same levels of price spikes simultaneously; therefore, mark price is used to prevent market manipulation. Unrealized PnL (Profit and Loss) is calculated based on this mark price. Choosing this reference price format can help you reduce risk.

Index Price: the price compared to the cryptocurrency’s price in the general Spot market. Index prices are often at discounts compared to the last price. This is because futures market trading prices typically include a higher spread compared to the spot market price.

Apart from these reference price formats, there are two ways of displaying trading performance and results in the futures market, which can help traders make informed decisions:

PNL (Profit and Loss): displays the profit or loss from trading, indicating how much profit or loss has been generated from a specific futures contract. For instance, if the trader has deposited 100 USDT as margin and the PNL shows +30 USDT, it means that closing the Futures contract would result in a profit of 30 USDT, excluding trading fees.
ROE (Return On Equity): often displayed as a percentage. For example, if the starting margin for trading is 100 USDT and a PNL of 30 USDT has been generated, the ROE would be 30%.

As Futures trading allows for adjusting leverage levels, individuals with lower initial margins can achieve higher PNL and ROE figures. However, this might not accurately reflect actual trading abilities. This is akin to considering ROI (Return On Investment), which shows portfolio growth as a percentage without factoring in margin size and leverage rate.

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