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For those who invest in derivatives, trade Futures, and play Long Short, the Funding Rate is likely not unfamiliar.
However, there are also many newcomers who are encountering this concept for the first time.
Therefore, in this article, let’s explore with Allinstation what Funding Rate is and how to trade based on this index.
What is Funding Rate? The importance of Funding fees for traders?
Funding Rate is a periodic payment fee for investors who are buying (Long) or short selling (Short). It is commonly seen on Margin and Futures exchanges and is considered a holding fee to maintain orders.
This index changes based on the difference between the price in the perpetual contract market and the spot price.
Therefore, depending on their position, investors will have to pay or receive money from others.
What is the purpose and how does the Funding Rate work?
The purpose of the Funding fee is to prevent the prices of the Futures market and the spot market from diverging too far.
Typically, this index is updated several times a day. Specifically, on Binance Futures, it adjusts every 8 hours (7:00, 15:00, and 23:00).
And importantly, you only have to pay this fee at the time the index adjusts.
In other words, if you open and close orders within the time frame between Funding Rate calculations, you will not need to pay this fee.
Funding rateFor example, in the image above, the white numbers in the red box indicate the remaining time before this index adjusts.
Specifically, there is nearly 6 hours and 50 minutes left before the next adjustment. If you complete buying and selling before the time runs out, you will not have to pay or receive the Funding fee.
The magnitude of the Funding Rate depends on the difference between the two markets. During times of high market volatility, the price between perpetual futures contracts and the spot price can differ.
When the Funding Rate is positive, meaning the price in the Futures market is higher than the spot market price, the buyer (long) will have to pay the short seller (short).
Conversely, if this index is negative, the coin price in the Futures market is lower than the spot market. This means the seller will have to pay the buyer.
Learn how to calculate the Funding fee for each transaction on the exchange
After understanding the concept, you need to know how to calculate the Funding fee from the Funding rate.
The calculation of the Funding fee is quite simple. Specifically, the formula is as follows:
Funding Fee = Your order value * Funding rate
Returning to the example above, if you have 10 USD and open a Long order with 20x leverage, the order value is 200 USD.
In the image, the Funding rate (orange number in the red box) is -0.0025%. This means you have to pay an amount of 200 * (-0.0025%) = -0.005 USD. This means you will receive 0.005 USD from the short side.
On the Binance exchange, the maximum Funding rate is 0.5% regardless of how volatile the market is.
How does the Funding Rate affect traders?
Historically, the Funding Rate often has a certain correlation with the price trend of the underlying asset.
Correlation between BTC price and Funding rate. Source: BinanceTherefore, this index often has a large correlation with traders’ sentiment. The more optimistic the market, the more positive it is, and vice versa.
A typical example is during the recent BTC decline, this index remained negative for a long time.
Chart BTCUSDT Perpetual and Funding indexHowever, this is just a reference index and sometimes there are errors, so you should consider carefully.
Trading methods based on Funding Rate to increase profits
Currently, you can use this index as a factor influencing trading decisions.
Strong negative Funding Rate
This means the buyer is benefiting greatly from the seller, thereby increasing their buying to enjoy the Funding fee.
To make it easier to understand, I will take an example of the BLZUSDT Perpetual pair on Binance Futures. Specifically, at that time, the Funding Rate of this pair had dropped sharply to -0.5261%.
Funding rate BLZUSDT Perpetual on BinanceTherefore, you can place a buy order hoping this index will continue to be low, thereby increasing the BLZ price in the near future.
BLZUSDT 15m chart and Funding index of this pairAs a result, the BLZ price increased by 5% since placing the order. Thereby, you can gain a profit in a short time.
If trading in a larger time frame (in this case, the 4h frame), you can wait for the 4h candle to close with a strong negative Funding Rate and have a candle closing time of 4 hours before the index adjustment time (7:00, 15:00, and 23:00).
Then you place a buy order hoping the next candle will continue to be negative or traders will buy to enjoy the generous Funding fee.
BLZUSDT 4h chart and Funding index of this pairAnother example is the BNXUSDT Perpetual pair on Binance. At that time, this index was also strongly negative, at -0.21%.
Funding rate BNXUSDT Perpetual on Binance.Thereby, you can wait for the 4h candle to close with a strong negative Funding Rate and have a candle closing time of 11:00, 4 hours before the index adjustment time of 15:00.
As mentioned above, a strong negative Funding Rate means those entering Long orders will benefit. Therefore, you can expect the next 4h candle to rise and sell. The reason is that a number of people want to Long to enjoy the Funding fee.
BNXUSDT 4h chart and Funding rate of this pairStrong positive Funding Rate
Contrary to the negative funding rate case. The seller is benefiting greatly from the buyer, thereby increasing their buying and selling to enjoy the Funding fee.
Personal experience
Currently, I do not highly value this trading method for the following reasons:
- This method does not have a take-profit and stop-loss level. This is very inadvisable when trading.
- It depends heavily on the Funding rate. Meanwhile, this index is easily manipulated by whales, so you will easily be “caught at the top”.
- The success rate and profit are not high.
Therefore, you must consider very carefully when using this method.
However, if you combine the Funding rate with other technical indicators, the success rate and profit will be much higher. Thereby, this index will be a powerful assistant for you.
What is a Japanese candlestick and basic candlestick patterns in Crypto and Forex
For example, the OCEANUSDT Perpetual pair on Binance. At this time, the Funding index of the pair is -0.2471%, a fairly strong negative level.
Funding rate OCEANUSDT Perpetual on Binance.If you analyze more closely, besides this index being negative, the OCEAN price is in a strong support area. At the same time, a strong marubozu bullish candle also appeared, confirming this.
OCEANUSDT 4h chart. Source: TradingviewBesides, drawing more patterns, you can see the OCEANUSDT chart is likely preparing to form a triple bottom pattern.
OCEANUSDT 4h chart and Funding index of this pair. Source: TradingviewBased on the above data, you can place a buy order with a stop-loss level below the support area and take profit at the nearest major resistance level.
If you look further into a smaller time frame, you can wait for a 15m candle with a strong negative Funding rate to buy.
OCEANUSDT 15m chart and Funding index of this pair. Source: TradingviewAs you can see, this buy order was successful, and you can gain a profit of over 50%.
Therefore, the Funding rate is a good tool if used in conjunction with other technical indicators.
How to monitor the Funding Rate
Currently, there are ways to monitor this index as follows: Exchange and Aggregator websites
View Funding rate on exchanges
You can simply monitor the Funding rate on Binance and FTX.
On Binance, you can go to this link to view the history of this index for pairs on Binance Futures.
Binance Funding history interfaceThen you select the pair you want to view by clicking on the Code box in the red area in the image.
Binance Funding rate history interfaceOn FTX, you can go to this link to view the Funding rate history of trading pairs.
FTX Funding rate history interfaceThen you select the pair you want to view by clicking on the All Futures box in the red area in the image.
FTX Funding rate history interfaceView Funding rate on aggregator websites
Besides the traditional way, you can view the Funding rate on websites like Coinglass, Coinalyze…
In this, I will take an example of Coinglass. You click on this link to access the website.
Coinglass interfaceAnother way is to go to the Coinalyze index viewing page. Specifically, you go to this link.
Coinalyze interfaceThen in the red Funding Rate Charts area, select the trading pair you want to view.
Coinalyze interfaceThen you can view the Funding rate chart and even forecast this index.
If you participate in crypto, you should prepare at least 3 accounts on 3 different exchanges because many coins and tokens have not yet been listed on Binance. Consider 3 exchanges: Bybit, MoonXBT, OKX
Allinstation has provided you with basic information about the Funding rate and trading methods based on this index. You can see it is a good tool if used in conjunction with other technical indicators. Let’s explore and evaluate to make the most informed investment decisions. Good luck!!!
If you participate in crypto, you should prepare at least 3 accounts on 3 different exchanges because many coins and tokens have not yet been listed on Binance, and the functions and rewards are different, so consider 3 exchanges: Bybit, MoonXBT, OKX!
