If you want to earn from perpetual contracts, there is a concept you absolutely must understand. That is the funding rate.

Simply put, the funding rate is the fee exchanged periodically between long and short position holders. When the price of the perpetual contract deviates from the spot price, it functions to bridge that gap.

When it’s positive, longs pay shorts. When it’s negative, the opposite occurs. Essentially, it’s a mechanism to balance the positions.

The true nature of the funding rate is actually composed of two elements. The first is the premium index. This measures the difference between the perpetual contract and the spot price, and when buying pressure is strong, it becomes a positive premium. Conversely, if selling pressure is strong, it turns negative. It’s simple.

The second is interest rates. This reflects the borrowing cost difference between the base currency and the quote currency. Usually, it’s a small and relatively stable value.

Since the calculation formula for the funding rate varies by exchange, it’s important to understand the specifications of the exchange you’re using. For example, a certain major futures exchange adopts a fixed interest rate model, with a default rate of 0.03% per day. This is paid in three installments every 8 hours.

The current funding rate and countdown are displayed at the top of the trading screen, so you can always keep track of the next payment timing.

To manage risk properly, monitoring the movement of the funding rate is essential. Before opening a position, understanding what the funding rate is at that moment, and how it might move in the future, is key to protecting your profits.