Backpack introduced Perpetual Futures (a.k.a. perps) on the Exchange which enables users to speculate on the price movement of a crypto market.
Perpetuals do not have a set expiration date and remain open indefinitely until you choose to close them. They use a funding rate mechanism to keep the contract price close to the underlying asset’s spot price.
What is a perpetual contract, and how does it differ from a traditional futures contract?
A perpetual contract is a type of derivative that allows traders to speculate on the price movement of an underlying asset without a set expiry date, unlike traditional futures contracts, which have a fixed maturity date.
Perpetual contracts remain open indefinitely until you choose to close them, and they use a funding rate mechanism to keep the contract price close to the underlying asset’s spot price.
What is the Mark Price, and why is it important in perpetual contracts?
The Mark Price is the fair value price used to calculate your unrealized profit and loss (PnL) and to determine whether your position is at risk of liquidation. It’s calculated using a combination of the spot price and a moving average to prevent market manipulation.
The Mark Price ensures the liquidation process is fair and prevents unnecessary liquidations caused by sudden price spikes or drops.
How does the funding rate affect my open positions in a perpetual contract?
The funding rate is a periodic payment exchanged between long and short positions to keep the contract price aligned with the spot price. If the funding rate is positive, long positions pay short positions, and if it is negative, short positions pay long positions.
The funding rate is charged or paid at regular intervals, and it can impact your overall profitability, especially if you hold a position for an extended period.
What happens if I hold a perpetual contract for an extended period?
If you hold a perpetual contract for a long duration, the funding rate will continuously affect your position. Depending on the prevailing market conditions, you may either pay or receive funding payments. Holding a position during periods of high funding rates can significantly increase the cost of your trade.
It’s essential to monitor the funding rate and your position’s PnL to manage long-term exposure effectively.
How does the Last Traded Price differ from the Mark Price in a perpetual contract?
The Last Traded Price is the most recent price at which a contract was traded on the exchange, while the Mark Price is the fair value price used to determine liquidation and PnL.
The Last Traded Price can be volatile and subject to market manipulation, which is why the Mark Price is used as a more stable reference for risk management and margin calculations.
Why might I want to close a perpetual contract before the funding rate is charged?
You might choose to close a perpetual contract before the funding rate is charged to avoid incurring additional costs.
If you anticipate that the funding rate will be unfavorable for your position (e.g., if you’re holding a long position and the funding rate is significantly positive), closing your position in advance can help minimize expenses and preserve your profits.
Can I use conditional orders in perpetual contracts, and how should I set them?
Yes, you can use conditional orders in perpetual contracts to automate your trading strategy. Conditional orders are triggered when specific conditions are met, such as when the market reaches a certain price. When setting a conditional order, carefully consider market volatility and your desired risk management strategy.
This can help you execute trades automatically without constantly monitoring the market.
How do I calculate the impact of the funding rate on my position?
To calculate the impact of the funding rate on your position, multiply the notional value of your contract by the funding rate. For example, if you have a $10,000 long position and the funding rate is 0.01%, the cost would be $10 per funding interval.
It’s crucial to factor in these payments, especially for large or long-term positions, as they can significantly impact your overall returns.
How can I manage the risk of liquidation in a perpetual contract?
Managing the risk of liquidation involves closely monitoring your Account Margin Factor (AMF) and maintaining sufficient collateral. Strategies to reduce the risk of liquidation include:
- Using leverage responsibly: Avoid over-leveraging your account, as it increases your exposure to market fluctuations.
- Adding collateral: Deposit more collateral to improve your margin health and reduce the likelihood of liquidation.
- Using conditional orders: Set conditional orders to help automate your trades and manage risk efficiently in volatile markets.
What should I consider when trading perpetual contracts during high volatility?
During high volatility, the risk of sudden price movements and slippage increases. Consider the following:
- Wider price fluctuations: Be prepared for larger and more frequent price changes that can impact your margin level.
- Funding rate spikes: The funding rate may become more volatile, affecting the cost of holding positions.
- Liquidity: Order book depth may change rapidly, causing higher slippage and potential difficulties in executing trades.
Adjust your risk management strategy accordingly and monitor the market closely.
What role does liquidity play in perpetual contracts?
Liquidity is crucial in perpetual contracts because it affects the ease with which you can enter or exit positions and the amount of slippage you may experience. Higher liquidity generally leads to tighter bid-ask spreads and smoother order execution, while lower liquidity can increase trading costs and the risk of slippage.
It’s important to trade perpetual contracts on liquid markets, especially when using large positions.
How does holding a long position in a perpetual contract differ from holding a short position?
When you hold a long position, you profit from price increases, while a short position benefits from price decreases. Additionally, the impact of the funding rate will differ:
- Long positions: You may have to pay the funding rate if the market sentiment is bullish and the rate is positive.
- Short positions: You may receive the funding rate if the market sentiment is bullish and the rate is positive. The reverse applies when the market sentiment is bearish.
Understanding these differences can help you optimize your strategy and manage the costs associated with perpetual contracts.
What are the benefits of using perpetual contracts for hedging?
Perpetual contracts are useful for hedging because they allow you to protect your portfolio against price drops without an expiry date. For instance, if you hold a large amount of an asset and expect a downturn, opening a short position in a perpetual contract can offset potential losses.
Example: Suppose you own $5,000 worth of BTC and expect a price drop. A short position in a BTC perpetual contract could offset the loss on your spot holdings, effectively stabilizing your overall portfolio value.
How can I minimize the costs associated with trading perpetual contracts?
To minimize trading costs, consider the following:
- Monitor the funding rate: Close or adjust positions to avoid paying high funding rates when possible.
- Use appropriate leverage: Lower leverage reduces the risk of liquidation and the need to add more collateral.
- Trade during liquid market conditions: Higher liquidity generally results in lower slippage and tighter spreads.
Additionally, review your trading strategy regularly and make adjustments to optimize your performance while keeping costs in check.
Do you have questions or require further information?
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