The perpetual contract is a financial derivative which allows traders to speculate on the price movements of an underlying asset Unlike conventional term contracts, which mature on a given date, perpetual contracts can be held indefinitely, provided they maintain sufficient margin and pay periodic costs called funding rate .
These contracts have become extremely popular, especially in the field of cryptocurrencies . They offer traders increased flexibility thanks to the absence of expiration date and the possibility of using a lever effect , which makes it possible to increase the size of the positions while initiating a fraction of total capital.
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How do perpetual contracts work?
Perpetual contracts operate similarly to conventional term contracts, except that they do not have an expiration date. The principle is simple: a buyer takes a "long" position if he anticipates an increase in the price of the underlying assets, and a "short" (or "short") position if he expects a drop. However, unlike traditional term contracts, it is necessary to pay periodic costs, called funding rate , to maintain these open positions.
The key role of the financing rate in market balance
The funding rate is a mechanism used to maintain the alignment between the price of perpetual contracts and the cash price of the underlying assets. The cash price, or spot price, is the current price from which an asset can be purchased or sold immediately on the market. It reflects the actual and immediate value of the assets. On the other hand, the price of a perpetual contract can sometimes diverge from this cash price due to speculation or anticipations of traders.
When the price of the perpetual contract is higher than the cash price , this means that traders are generally optimistic about the future development of the market. In this case, long traders (those who bet on the rise in the price) must pay a financing rate at the traders shorts (those who bet on a drop). Conversely, if the price of the perpetual is lower than the cash price, the traders shorts pay long traders.
This financing rate system acts as a balancing mechanism , encouraging traders to adjust their positions and prevent an excessive difference between the prices of the perpetual and the cash market. Funding rate payments are made at regular intervals, generally every 8 hours, although this can vary depending on the platform or the market.
What is the margin in perpetual contracts?
The margin is the amount of money you need to deposit to open a position with lever. For example, if you want to take a position of $ 1000 with a lever effect of 10x, you will only need $ 100 of margin. The isolated margin means that your risk is limited to the specific margin that you have deposited for a given position, while the cross margin uses all of the available balance to cover the losses of a position, thus minimizing the risk of liquidation.
The role of stop-loss in perpetual trading
Stop -loss is a crucial tool in risk management. It allows you to define a trigger price from which your position will be automatically fenced to avoid excessive losses.
For example, if you have a long position and the price drops sharply, a stop-loss will protect you against total loss by automatically closing your position at a certain price level.
The different types of orders in perpetual contracts
To optimize trading, several types of orders allow traders to define specific strategies to enter or get out of a position:
Limit order : This order allows the trader to set a price at which he wishes to buy or sell an asset. The order will only be executed if the price of the market reaches or exceeds this defined level, thus guaranteeing that the transaction is carried out at the desired price or better.
Advanced limit order : similar to the classic limit order, but with added automatic triggers. For example, the order is only triggered if a precise condition is fulfilled, such as a price or volume variation on the market. This makes it possible to define more complex conditions for the transaction.
Market Order : This order is immediately executed at the best price available on the market when order has passed. It makes it possible to secure a quick entry or exit, but at the current market price, which can vary depending on the liquidity.
Order Trigger : An order that is only activated when a certain predefined price is reached. Once triggered, it is generally converted into a market order, which means that the asset will be purchased or sold at the current price, rather than locking execution at a specific price as with a limited order.
TRAILING STOP is a type of dynamic stop-loss order which automatically adjusts its level according to the favorable evolution of the price of an asset. It protects gains while letting the market evolve freely. Here is a encrypted example to clarify the concept:
Example :
Imagine that you buy a cryptocurrency at $ 100 and that you place a Stop Trailing with a difference of 10 % . Here is what is happening:
Purchase at $ 100 : you buy the asset at $ 100. Trailing stop is automatically placed at $ 90 ($ 100 - 10 %). If the price drops directly to $ 90, the stop order is triggered and you sell automatically to limit your losses.
The price rises to $ 110 : as the market evolves in your favor, trailing stop follows this increase. It adjusts according to the new price. With a 10 %difference, TRAILING STOP moves to $ 99 ($ 110 - 10 %).
The price rises to $ 120 : the market continues to evolve positively. TRAILING STOP now moves to $ 108 ($ 120 - 10 %).
The price reaches $ 125, then drops to $ 115 : when the price reaches $ 125, the Stop Trailing moves to $ 112.50 ($ 125 - 10 %). If the price descends to $ 115 , nothing happens, because trailing stop has not yet been reached.
The price drops to $ 112.50 : at that time, the Stop Trailing is triggered at $ 112.50 , and you sell the assets. This allows you to secure a profit of $ 12.50 compared to your initial purchase price of $ 100, even if the price has started to drop.
Delivered order : this order is to place several orders at different price levels. This makes it possible to benefit from multiple entry or exit points according to market fluctuations, thus maximizing opportunities to make earnings or to secure positions.
What do TP/SL mean?
Take profit (TP) is an automatic order that ends a position when the price reaches a certain level of profit, while Stop Loss (SL) is an order to limit losses. These two tools are used to manage risks and secure profits.
Difference between trading spot, long -term trading and trading with margin
Trading spot involves the immediate purchase and sale of assets, while trading with margin makes it possible to take greater positions by borrowing funds, which increases potential gains but also risks. Trading in the long term is to buy or sell an asset on a future date at a predefined price, while perpetual contracts have no expiration date.
Platforms where trader of perpetual contracts
Regarding platforms, perpetual contracts can be negotiated on CEXs like Binance (trading not available in France), Bitget and Crypto.com Exchange .
Dex side , platforms like dYdX , GMX , Perpetual Protocol or the innovative Drift On Solana allow you to trader directly from your crypto wallet, without going through a centralized platform.
Slipping: a factor to take into account
Slipping is the difference between the expected price of an order and the real price to which it is executed . This generally occurs in low liquidity markets or when large orders are executed quickly. On the CEX , the Slippage is generally lower due to higher liquidity, while on Dex , it can be more important, especially during periods of high volatility.
Perpetual contracts in the DEFI: dYdX, GMX and perpetual protocol
In DEFI , Dex like dYdX , GMX or Drift allow traders to access perpetual contracts while maintaining total control of their funds. They offer advanced trading tools and a simple interface, competing with CEXs while being decentralized.
Risks linked to perpetual contracts
The main risk with perpetual contracts lies in the possibility of liquidation, especially if you use a high lever effect. In addition, payment of financing rates can result in additional costs to maintain an open position. risk management strategies , such as the use of stop-loss and careful management of the margin.
New features to come in perpetual trading
The development team is constantly working to improve DEX DEX , by introducing features such as oracles to avoid price handling, options to add new trading strategies, and integrations with other active and protocols DEFI .
FAQ: frequent questions about perpetual contracts
1. What is a perpetual contract?
A perpetual contract is a type of financial derivative which allows you to speculate on the price of an asset without expiration date, unlike traditional term contracts.
2. How do financing costs affect traders?
The financing costs are paid periodically by the traders to maintain their open positions. These costs help balance the market by adjusting long and short positions.
3. What platforms make it possible to trader perpetuals in France?
In France, you can use platforms like Kraken or Bitget to trader perpetuals, while Binance is not available.
4. What are the types of orders available to trader perpetuals?
The types of orders include Market , Limit , Trigger , and Trailing Stop , offering maximum flexibility to enter or get out of the positions.
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Noah
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
