Many people are asking what the funding fee is in leveraged trading. To explain simply, it is a fee you pay to hold your open position for a certain period. This fee is commonly encountered in futures and margin trading.

It is especially paid approximately every 8 hours. Usually three times a day, but in rare cases, it can be four times. So, where do these details come from when you ask what the funding fee is?

Actually, everything depends on the price difference between the spot market and the futures market. When the pair you are trading is priced differently in the two markets, this difference affects the funding rate. The funding rate we see on exchanges is a percentage representation of these metrics.

For example, if the price on the spot side is higher than on the futures side, it indicates that short positions are dominant in that pair. In this case, the funding rate becomes negative. As the price difference increases, the weight of short traders grows, and the funding rate becomes more negative. In such a situation, until the imbalance between the spot and futures markets is corrected, part of the funding paid by traders in short positions is transferred to traders in long positions.

Based on this data, it is more prudent to use the funding rate as an indicator rather than making trades solely based on it. Since the market often moves against the majority, relying too heavily on this metric can be risky. However, understanding what the funding fee is helps in grasping market dynamics.