Trading perpetual futures on Binance

Perpetual futures

What are futures?

Futures are contracts, so basically they’re agreements to buy or sell a commodity, currency, or any other instrument at a predetermined price at a specified time in the future. In this case the underlying asset is cryptocurrency.

What are perpetual futures?

Unlike traditional futures perpetual futures don’t have an expiry date. There’s no obligation to settle at a certain date. In the case of Binance the underlying asset will be an “Index Price” of the cryptocurrency. This Index Price is an average price of the cryptocurrency based on the price on different spot markets (such as Binance itself) according to the volume and price of those markets. Unlike conventional futures, perpetual futures are traded at a price that’s very close to that of the spot market.

Why trade futures?

You might wonder if it follows price closely of that of the underlying crypto asset why bother trading futures. Why not directly trade the underlying crypto?

Leverage

Futures offer some advantages over regular trading of cryptocurrency. For example you can trade using leverage. For example a 10x leverage.

Shorting

Even without owning a certain crypto asset you can bet against its performance. Let’s illustrate this with a simple example.

What is the Funding rate?

Funding are payments between buyers and sellers, based on the current funding rate. A positive funding rate means the traders who are buying (long) contracts have to pay the ones who are selling (short) contracts, a negative funding rate means the opposite.

What is the mark price?

The mark price is an estimate of the true value of a contract (fair price) when compared to its actual trading price (last price). The mark price calculation prevents unfair liquidations that may happen when the market is highly volatile.

What is PnL?

PnL stands for profit and loss, and it can be either realized or unrealized. When you have open positions on a perpetual futures market, your PnL is unrealized, meaning it’s still changing in response to market moves. When you close your positions, the unrealized PnL becomes realized PnL (either partially or entirely).

Insurance fund and Auto-deleveraging

Binance has also set up an insurance fund that uses collateral taken from liquidated traders and also uses auto-deleveraging to cover potential losses in case of extreme volatility.

How to trade perpetual futures?

Conventional trading

You can trade the same way you trade spot markets, you only need to be more careful in managing your risk due to the higher risk of liquidation. And you have to keep in mind the additional costs involved.

Collecting premium

As discussed higher up depending on the market the funding rate is either positive or negative and either the long or the short positions will be compensated.

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