Trading between the Funding Rates in Perpetual Futures Trading

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Many traders who trade Futures are not aware that the major exchanges take a percentage of the trade for funding fees. These fees are applied to all open Perpetual Futures Contracts to keep the price some way in line with the spot market. A fixed term Futures Contract will have premium and discount rates applied depending on the contract but with Perpetual contracts , they do not expire so the exchanges have to apply funding fees to make sure the Future Price doesn't go off on one. On Binance these are applied every 8 hours. At 8am in the morning, 4pm and 12am GMT. So many Futures traders see a flurry of activity at these times of the day and funding rates are the reason for this. The funding fee applied depends on how far off the Futures price is to the spot market. If the Futures price is higher than the spot price then the funding fee will be applied to anyone in a long position.. This fee will then be given to anyone in a short position. The same is applied to if the Futures price of a coin is lower than the spot. When funding fee wants to encourage long positions to increase the price to be on parity with the spot market and therefore the funding fee will be minus which means it will take from the short positions and give the % to the long positions. Funding fees can range from 0.001 to 0.75%. Now this may sound very small but Futures involves large amounts of spondulex and these percentages start adding up pretty fast if you are on the right side of the fees.
Alot of Futures traders seem to think the funding fees are applied when there are more buyers than sellers or vice versa. This is a load of codswallop as in Futures you cannot make a contract unless you have a contract set up to go in the opposite direction which means you can't have more buyers than sellers.

Let's take a look at a simple example. By the way, the funding fee countdown timer is on the Futures trading platform like below but it is fairly small given the importance of it. The funding fee for CVX below is -0.1340% and will be taken in an hour and 17 minutes. It is important to note that this funding fee is a minus figure which means that short sellers pay traders with long positions in this case as the Future price is below the spot market.

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Bitcoin is on the rise. The Futures price is $17,000 but yet the spot price is $16,600. The funding fee applied will encourage traders to set up more short positions to bring the Futures price down to meet the spot price.
Therefore a funding fee will apply for long positions to pay short positions every 8 hours. So say the funding fee in this case is 0.30% (which is the funding fee today). If you set up a $200 long position then you will pay 60 cent in funding fees every 8 hours. Now if someone else decides to short Bitcoin with $200 they will receive the 60 cent in fees. Going back to the long position. They will be discouraged in their position if they have to pay fees every 8 hours and will maybe close their positions. Also more short positions will be set up to take advantage of the fees. Eventually the price aligns with the spot and the funding rate is 0.00%. It never is but that's the idea.

Now you don't need much to set up a Futures position of $ 200 so let us say it is $2000. Then all of a sudden we are paying a commission of $6 going long and receiving $6 going short. All of a sudden a short position is fairly lucrative and this my friends is what moves markets every 8 hours.

Now many traders trade around the funding fee. Many traders close positions so they do not have to pay the Funding Fee. Once you are out of the position before the countdown timer goes to zero you will not be charged. So many traders close positions or have bots set up to close the positions before any fee is taken. Other traders like myself would open positions to obtain the Funding fee. It's kind of like a cash and grab. You open a position where you are going to get paid the funding fee. Once the timer reaches zero you get the hell out of there with the fees before other like minded traders do the same. If there is many traders trading the same way then this obviously affects the price to your detriment and traders might hang around to earn the fees before they close their position. So when the timer hits zero you are out of there. The higher the funding fee then the more volatility in the market so there are risks but you can actually make quite alot of money from these fees alone. Last month for example half my profits were Funding Fees alone.

Funding fees are also easier to hedge against when they are in a plus percentage as the long positions pay the short positions. So you can short on your Futures contract and go long on your spot position to hedge against risk. In theory the trades should come out balanced and the Funding fee is then the profit but this is easier said than done.

Trading the funding fees are really for ranging markets where Bitcoin is stable and but the downside to this is that the Funding Fees will be pretty low. In volatile markets you can get crazy funding fees that are worth the risk if you can get in and get out quick enough. The other advantage to trading this way is that you don't really have to watch the candles. You get in and get out 3 times a day and go off about your business without having to worry about open positions. There is not much really online about funding fees bar a couple of lads that do quite good videos in fact. Here is one. The exchanges themselves actually do a good job explaining them also and real time funding rates can be found here.

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Just thought I would make this post because if someone explained this to me at the start of my Futures trading then I wouldn't have been liquidated quite as much. If it is any help at all then my work here is done.