One of the things you need to pay attention to in leveraged trading is the funding fee. Many traders overlook this, but over the long term, it can become a significant cost.

To explain what the funding fee is simply, it’s a cost you pay for keeping your position open for a certain period. It’s especially common in futures and margin trading. It’s usually calculated over an 8-hour period and paid three times a day. In rare cases, depending on market conditions, it can be paid four times.

So, how does this fee change? Here, the price difference between the spot market and the futures market comes into play. If the asset you’re trading is priced higher on the spot side than on the futures side, it indicates that short positions are dominant. In such a case, the funding rate becomes negative. The wider the price gap, the deeper the negative rate.

Here’s how it works: until the excess weight on the short side is balanced, those in long positions receive part of the funding fee paid by shorts. In other words, the market tries to self-correct.

A tip: the market often moves against the majority. So, instead of using the funding rate data directly as a trading signal, think of it as an indicator or a market signal. Incorporate it into your strategy, but don’t rely on it alone. Especially for long positions, try to minimize the holding time to reduce this cost.