How can understanding these prices improve my trading strategy?
Understanding the interplay between futures price and spot price can significantly enhance your trading strategy. For instance, if the futures price is higher than the spot price (a situation known as "contango"), it suggests that traders are expecting the price of the cryptocurrency to rise in the future. This could be a signal to consider buying the cryptocurrency. Conversely, if the futures price is lower than the spot price (a situation known as "backwardation"), it suggests that traders are expecting the price to fall, which could be a signal to consider selling. Additionally, understanding these prices can help you identify potential arbitrage opportunities. For example, if the futures price is significantly higher than the spot price, you could consider buying the cryptocurrency at the spot price and simultaneously selling a futures contract. When the contract expires, you could sell the cryptocurrency at the higher futures price, making a profit from the price difference.