What is the funding fee we often encounter in leveraged trading? The answer is actually quite simple. You can think of this fee as the cost of holding your open position over a certain period of time.

You encounter this fee especially in futures and margin trading. Payments are typically made three times a day in 8-hour cycles, and in some market conditions, it can be four times. So, if you hold a Long or Short position, these fees are automatically deducted from your account.

The size of the funding fee depends entirely on the price difference between the spot market and the futures market. If a pair on the spot side is priced higher than on the futures side, then the majority of traders are in Short positions. In this scenario, the funding rate becomes negative. The wider the price gap, the more of the funding fee paid by traders in Short positions is transferred to those in Long positions. This mechanism continues until the market reaches equilibrium.

The funding rate shown on exchanges is presented as a percentage. This rate indicates which side of the market is more dominant. For example, a negative rate indicates that Short positions are prevailing. A positive rate suggests that Long positions are in the majority.

From a trader’s perspective, the question "What is the funding fee?" also serves as a risk management tool. Yes, this fee increases the cost of your position, but it also helps you gauge market sentiment. Since the market often moves contrary to the majority, it’s wiser to use this as an indicator rather than making trades solely based on the funding rate. If the rate is high, Long positions are riskier; if it’s low, Short positions should be watched more carefully.