1. TLDR for perp trading (even beginners can understand in minutes)
Original Title : "The Principles that exchanges use" from: https://twitter.com/inverseorca_/status/1525957670347358208?s=21&t=TVlgC4EPS0c9hrlPbHPmvg by https://twitter.com/inverseorca_
Most traders lose money while trading, mainly because few understand the principles that exchanges use; I’ll explain some here.
If you’re loosing money trading and you want to know why, perpetual swaps, Funding rates(and how you can profit off them), how liquidations occur, and risk management explained.
The fundamental question is, what is a perp(what you’ve been trading)? A perp is an agreement to buy/sell an asset in the future non-optionally. i.e., A bet where you must buy/sell an asset at a future date.
A funding rate is a fee based on the premium or discount of an asset which is the positive or negative deviation of the price of the perp to the spot price across major exchanges of this asset. This fee is paid every 8 hours on most exchanges.
While trading, you might be on the winning side of trades, but because many people are on the same side as you, you all may impact the price of an asset such that it deviates from its fair price globally, and exchanges have one job: to allow you to buy/sell an asset at a universally fair price. Since people on the same trade side have caused a deviation in price, you have to pay a fee to those unjustly losing. That fee is called the funding rate.
You can benefit mainly from the funding rate by:
Arbitrage: e.g., If the funding rate is positive, longs pay shorts, a trader can buy the particular asset on the spot market and open a short position(perp) on the asset and capture the funding rate every 8 hours.
By going long( buying the asset on spot) and going short simultaneously, traders maintain a delta-neutral position on the said asset while making profits off the funding rates.
A liquidation happens when your collateral is not enough to cover your position. If you open a trade on 50x leverage, you’re rekt if the market moves by 2% ( Be careful with leverage, boys). While trading, try to manage your risk.
While trading, always use your stop loss/ trailing stop. Don’t trade with emotions. One of the best trading strategies has always been to follow the trend, buy when the price goes up, and sell when the price goes down. While trading, always allocate only a few chunks of your portfolio towards particular trades and do not use lots of leverage.