Perpetual contracts are a popular derivative product in the cryptocurrency market. Unlike traditional futures, they have no expiry date, allowing traders to hold positions indefinitely. This guide will walk you through their key characteristics and how to use them effectively.
What Are Perpetual Contracts?
Perpetual contracts are agreements to buy or sell an asset at a predetermined price, without an expiration date. They are designed to mimic spot markets while offering leverage, making them attractive for both short-term and long-term strategies.
Key Features of Perpetual Contracts
No Expiration Date
Unlike traditional futures contracts, perpetual contracts do not have a settlement date. Traders can hold positions for as long as they wish, provided they maintain sufficient margin. This eliminates the need to roll over contracts periodically.
Leverage Trading
Leverage allows traders to control large positions with a relatively small amount of capital. For example, with 100x leverage, a $1 investment can control $100 worth of cryptocurrency. While this amplifies profits, it also increases risk significantly.
Example:
If Bitcoin’s price rises by 1% with 100x leverage, a $1 investment would yield a 100% return ($1 profit). However, a 1% drop would result in a total loss of the initial margin, triggering liquidation.
Long and Short Positions
Traders can profit from both rising (long) and falling (short) markets.
- Long Positions: Benefit from price increases.
- Short Positions: Profit from price declines.
Short Selling Example:
Borrowing $100 worth of Bitcoin, selling it immediately, and repurchasing it at $99 after a 1% price drop yields a $1 profit (100% return on a $1 margin).
Funding Rate Mechanism
To ensure the contract price stays aligned with the spot price, exchanges use a funding rate. This fee is periodically exchanged between long and short traders. In bullish markets, long positions typically pay funding fees to short positions, and vice versa.
How to Trade Perpetual Contracts: A Step-by-Step Tutorial
Step 1: Account Setup
First, ensure you have an account on a supported trading platform. Complete identity verification and deposit funds into your trading account.
Step 2: Navigate to the Contract Interface
Access the "Trading" section and select "Perpetual Contracts." Choose your desired cryptocurrency (e.g., MATIC/USDT).
Step 3: Select Margin Mode
- Cross Margin: All positions share the same margin pool. Higher risk if multiple positions are open.
- Isolated Margin: Each position has independent margin. Safer for diversified strategies.
For beginners, isolated margin is recommended to limit risk exposure.
Step 4: Choose Order Type
- Limit Order: Set a specific entry price. Lower fees but requires patience.
- Market Order: Execute instantly at current market prices. Higher fees.
- Stop-Limit/Take-Profit: Automate exit strategies to manage risk.
Step 5: Calculate Position Size
Use the built-in calculator to estimate:
- Liquidation price
- Potential profit/loss
- Funding costs
For example, a $200 position with 3x leverage on MATIC at $0.41 may liquidate at $0.203.
Step 6: Execute and Monitor
After confirming order details, monitor your position’s performance. Adjust stop-loss or take-profit levels as needed.
Risk Management Strategies
- Use Low Leverage: Start with 3-5x to avoid overexposure.
- Set Stop-Loss Orders: Limit losses to 1-2% per trade.
- Avoid Overcrowded Trades: High funding rates can erode profits.
- Diversify: Never allocate more than 5% of capital to a single trade.
👉 Explore advanced trading strategies
Frequently Asked Questions
What is the main difference between perpetual and quarterly contracts?
Perpetual contracts have no expiry date, while quarterly contracts settle every three months. Perpetuals also use funding rates to maintain price alignment.
How often is funding paid/received?
Funding rates are typically exchanged every 8 hours. Rates vary based on market sentiment and open interest.
Can perpetual contracts be held long-term?
Yes, but funding costs may accumulate over time. In bullish markets, long holders pay fees, reducing overall returns.
What triggers liquidation?
Liquidation occurs when losses exceed available margin. For example, a 1% adverse move with 100x leverage will liquidate the position.
Is perpetual trading suitable for beginners?
Due to high risk, beginners should practice with low leverage and small positions. Prioritize learning risk management first.
How do I avoid funding fee losses?
Trade during neutral market conditions or use strategies that benefit from funding rate flows (e.g., shorting in bullish markets).
Conclusion
Perpetual contracts offer flexibility and profit opportunities but require disciplined risk management. Always start with small positions, use conservative leverage, and continuously educate yourself on market dynamics. For those seeking to deepen their understanding, 👉 discover comprehensive trading tools to enhance your strategy.