A perpetual contract is a financial derivative that allows traders to speculate on the price movements of an underlying asset without having to worry about an expiration date. Unlike traditional futures contracts, which expire on a specific date, perpetual contracts can be held indefinitely, provided sufficient margin is maintained and periodic fees known as financing rates .
These contracts have become extremely popular, particularly in the cryptocurrency . They offer traders increased flexibility thanks to the absence of an expiry date and the possibility of using leverage , which allows for larger positions while committing a fraction of the total capital.
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How do perpetual contracts work?
Perpetual contracts function similarly to traditional futures contracts, except they do not have an expiration date. The principle is simple: a buyer takes a "long" position if they anticipate a rise in the price of the underlying asset, and a "short" position if they expect a fall. However, unlike traditional futures contracts, it is necessary to pay periodic fees, called financing rates , to maintain these positions.
The key role of the financing rate in market equilibrium
The financing rate is a mechanism used to maintain alignment between the price of perpetual contracts and the spot price of the underlying asset. The spot price is the current price at which an asset can be bought or sold immediately on the market. It reflects the asset's true and immediate value. In contrast, the price of a perpetual contract can sometimes diverge from this spot price due to speculation or traders' expectations.
When the price of a perpetual contract is higher than the spot price , it generally indicates that traders are optimistic about future market movements. In this case, long traders (those betting on a price increase) must pay a financing rate to short traders (those betting on a price decrease). Conversely, if the perpetual contract price is lower than the spot price, short traders pay long traders.
This funding rate system acts as a balancing mechanism , incentivizing traders to adjust their positions and preventing excessive spreads between perpetual and spot market prices. Funding rate payments are made at regular intervals, typically every 8 hours, although this can vary depending on the platform or market.
What is margin in perpetual contracts?
Margin is the amount of money you need to deposit to open a leveraged position. For example, if you want to take a $1,000 position with 10x leverage, you would only need $100 in margin. Isolated margin means your risk is limited to the specific margin you deposit for a given position, while cross margin uses your entire available balance to cover losses on a position, thus minimizing liquidation risk.
The role of stop-loss orders in perpetuals trading
A stop-loss order is a crucial tool in risk management. It allows you to set a trigger price at which your position will be automatically closed to prevent excessive losses.
For example, if you hold a long position and the price falls 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 for entering or exiting a position:
Limit order : This order allows the trader to set a price at which they wish to buy or sell an asset. The order will only be executed if the market price reaches or exceeds this defined level, thus guaranteeing that the transaction will be completed at or better than the desired price.
Advanced Limit Order : Similar to a standard limit order, but with added automatic triggers. For example, the order is only triggered if a specific condition is met, such as a change in price or volume in the market. This allows for more complex transaction conditions.
Market order : This order is executed immediately at the best available market price at the time the order is placed. It allows for a quick entry or exit, but at the current market price, which may fluctuate depending on liquidity.
Trigger order : An order that is only activated when a certain predetermined price is reached. Once triggered, it is usually converted into a market order, meaning the asset will be bought or sold at the current price, rather than locking execution at a specific price as with a limit order.
A trailing stop is a type of dynamic stop-loss order that automatically adjusts its level based on favorable price movements of an asset. It allows you to protect profits while letting the market move freely. Here's a numerical example to clarify the concept:
Example :
Let's say you buy a cryptocurrency at $100 and place a trailing stop with a 10% . Here's what happens:
Buy at $100 : You buy the asset at $100. The trailing stop is automatically placed at $90 ($100 - 10%). If the price falls directly to $90, the stop order is triggered and you automatically sell to limit your losses.
The price rises to $110 : As the market moves in your favor, the trailing stop follows this increase. It adjusts based on the new price. With a 10% difference, the trailing stop moves to $99 ($110 - 10%).
The price rises to $120 : The market continues to move positively. The trailing stop is now at $108 ($120 - 10%).
The price reaches $125, then falls back to $115 : When the price reaches $125, the trailing stop moves to $112.50 ($125 – 10%). If the price falls back to $115 , nothing happens because the trailing stop has not yet been triggered.
The price drops to $112.50 : At this point, the trailing stop is triggered at $112.50 , and you sell the asset. This allows you to secure a profit of $12.50 compared to your initial purchase price of $100, even though the price has started to fall.
Staggered order : This order type involves placing multiple orders at different price levels. This allows you to take advantage of multiple entry and exit points depending on market fluctuations, thus maximizing opportunities to make profits or secure positions.
What do TP/SL mean?
A Take Profit (TP) order is an automatic order that closes a position when the price reaches a certain profit level, while a Stop Loss (SL) order is used to limit losses. Both tools are used to manage risk and secure profits.
Difference between spot trading, futures trading and margin trading
Spot trading involves the immediate buying and selling of assets, while margin trading allows for larger positions by borrowing funds, increasing both potential gains and risks. Futures trading involves buying or selling an asset at a future date at a predetermined price, while perpetual contracts have no expiration date.
Platforms for trading perpetual contracts
With regard to platforms, perpetual contracts can be traded on CEXs like Gemini .
DEX side , there are platforms like dYdX , GMX , Perpetual Protocol , and the innovative Drift Solana Solana to trade directly from your wallet , without going through a centralized platform.
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Slippage: a factor to consider
Slippage is the difference between the expected price of an order and the actual price at which it is executed. This typically occurs in markets with low liquidity or when large orders are executed quickly. On CEXs , slippage is generally lower due to higher liquidity, while on DEXs , it can be more significant, especially during periods of high volatility.
Perpetual contracts in DeFi: dYdX, GMX and Perpetual Protocol
In DeFi , DEXs like dYdX , GMX , and Drift allow traders to access perpetual contracts while maintaining complete control of their funds. They offer advanced trading tools and a user-friendly interface, rivaling CEXs while remaining decentralized.
Risks associated with perpetual contracts
The main risk with perpetual contracts lies in the possibility of liquidation, especially if you use high leverage. Furthermore, the financing risk management strategies , such as using stop-loss and careful margin management.
New features coming soon to perpetual trading
The development team is constantly working to improve DeFi DEXs , introducing features such as oracles to prevent price manipulation, options to add new trading strategies, and integrations with other DeFi assets and protocols .
FAQ: Frequently asked questions about perpetual contracts
1. What is a perpetual contract?
A perpetual contract is a type of financial derivative that allows speculation on the price of an asset without an expiry date, unlike traditional futures contracts.
2. How do financing costs affect traders?
Financing fees are paid periodically by traders to maintain their open positions. These fees help balance the market by adjusting long and short positions.
3. Which platforms allow trading perpetuals in France?
In France, you can use platforms like Kraken or Bitget to trade perpetuals, while Binance is not available.
4. What types of orders are available for trading perpetuals?
Order types include market , limit , trigger , and trailing stop , offering maximum flexibility for entering or exiting positions.
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Yoann
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.
