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Do you understand how the Funding Rate works?

If you trade Futures, you’ve probably noticed a percentage that changes periodically. It’s not a platform fee, nor is it money that Binance wants to take from you; it’s the balancing mechanism that keeps the Futures price tethered to the real market price, which is the Spot price.

$XRP

Perpetual Futures contracts have no expiration date, and to prevent the contract price from drifting too far from the actual asset price, the Funding Rate is used. It’s basically a payment between traders, bulls and bears.

There are two scenarios:

1. Positive Funding:
This occurs when the Futures contract price is higher than the Spot price. Those in Long positions pay those in Short positions.

2. Negative Funding:
This occurs when the Futures contract price is lower than the Spot price. Those in Short positions pay those in Long positions.

$ROBO

The Funding gives us insider info that we can use to our advantage, so here are some tips to keep in mind:

1. When the funding is extremely positive, the market is "heavy." A small drop can force the Longs to close, causing a massive decline. This is a dangerous time to enter Long.

2. If you’re a trader who leaves positions open for a long time, a high funding rate can eat into a significant portion of your profits.

3. Sometimes, the market pays you just for going against the crowd. If everyone is desperate to sell and the Funding is negative, you get paid for holding a Long position.

$ORDI

Don’t ignore that little number. If the funding is at very high levels, the market is about to make a sharp move to clean out those in the wrong position, because the market always seeks balance. Those who pay the funding tend to be the impatient ones; those who collect it usually have the plan.

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