The funding rates are periodic payments made by traders with an open position, long or short. Depending on the funding rate the trader who is in a position has to pay after a certain period (mostly 8 hours or daily) a fee. This fee could be positive as well, so that the trader with a position is receiving a reward for having their position open. The funding rates are there to maintain a balance between the amount of traders that are long and short. Therefor when the majority of the traders are shorting, there is a negative funding rate for short positions which means that traders in a short position pay a fee which goes to the traders (sometimes partly) that are in a long position. When the majority of the traders are long there is a positive funding rate which means that the traders in a long position are paying a fee to the traders in a short position.
The funding rates are a great reflection of traders sentiment and therefor we can use this metric into our trading strategy. If there is an extreme reading in the funding rates it often indicates caution for the opposite direction. For example, if the funding rates is extremely negative, it wouldn’t be a great moment to open a short position but rather look for evidence in the chart to check for a long position. We often see a quick bounce after an extreme reading of negative funding rates in the short term to restore the balance. In that way the funding rates can act as a direct signal for price prediction, however it also works over a longer period of time. Often when we are seeing negative funding over a longer period of time, the price tends to trend upwards. Similar as a longer period of time with positive funding rates the price tends to trend downwards afterwards. Do take in mind that negative of positive funding rates can maintain for an extended period and therefor should never be used as a sole indicator but rather as metric combined with other metrics (e.g. breakouts, price channels, patterns, on-chain statistics etc.)
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