Many friends who are new to contract trading may not fully understand its underlying logic and some key concepts, and there may even be some blind spots. This article will explain the rules of contract trading, common terminology, as well as the calculation methods for fees and funding costs in simple language, helping everyone avoid unnecessary losses.

In simple terms, the core of contract trading is 'buying up'

or 'selling down'; as long as the direction is correct, profit can be made. In the exchange, 'buying up' corresponds to 'going long' or 'buying', while 'selling down' corresponds to 'going short' or 'selling'.

Essentially, a contract is an agreement to buy or sell a certain asset at an agreed price at a future point in time. For example, if I go long when the BTC price is at 90,000 points, what I am actually purchasing is an agreement that states regardless of what the BTC price is in the future, I can buy BTC at 90,000. Since this agreement does not have a specific delivery time (it can be any future time), it is called a 'perpetual contract.'

If the future BTC price rises to 95,000 or 100,000 points, then the agreement bought at 90,000 points is clearly profitable; but if the price drops to 80,000 points, we would still be buying at 90,000 points, resulting in a loss. The same logic applies to 'short selling', i.e., selling agreements.

It can be seen that the contract price is anchored to the spot price. Since perpetual contracts do not have a specific delivery date and support 24/7 trading, logically, the spot price largely determines the contract price.



✨ Funding rate

In order to keep the contract price dynamically close to the spot price, the exchange has introduced the rule of funding rate.

When the funding rate is positive, long traders must pay fees to short traders; when the funding rate is negative, short traders must pay fees to long traders, usually settled every 8 hours. For example, when the contract price is significantly higher than the spot price, the funding rate will be positive and high, limiting long entries and encouraging short entries to bring the contract price closer to the spot price.



Specific calculation rule: funding cost = trading volume * funding rate

Taking orders and placing orders: Here we introduce the concept of 'counterparty.' Trading contracts is always done in pairs: when someone buys, someone will sell; if you choose to sell, someone will buy the part you sold, and that person is your counterparty. 'Taking orders' refers to already existing counterparties in the market where someone has placed an order on the exchange, and you directly complete the transaction with them. 'Placing orders' means that the trading price you set currently has no matching counterparty, and you need to place your order in the market and wait for a counterparty to actively complete the transaction with you. Typically, trades that deviate significantly from the market price are mostly placed orders.




Isolated margin and full margin:


In the exchange, we have funding accounts, spot accounts, and contract accounts, and funds can be transferred between these accounts. When we need to conduct contract trading, we need to transfer funds from other accounts to the contract account.

The full margin mode means that all funds in the contract account are used as margin, with the maximum loss being all funds in the contract account. The isolated margin mode allows for customized margin. For example, if there are 1000 USDT in the contract account, one can choose to use only 300 USDT as isolated margin, in which case the maximum loss would be 300 USDT.

In full margin mode, the leverage can be adjusted during the holding period, while in isolated margin mode, adjustments are not supported. However, both modes allow for additional margin to reduce risk.



Forced liquidation: When price fluctuations hit the forced liquidation point due to insufficient margin, the exchange will forcibly close your order. Forced liquidation usually incurs higher fees, so it is recommended to set stop-loss orders in advance to mitigate risk. It is important to note that the actual price of forced liquidation is often lower than the theoretically calculated price. For example, when using 10x leverage, theoretically, a price fluctuation of 10 points would trigger forced liquidation, but in reality, it may occur with a fluctuation of just over 9 points.


Be sure to set stop-loss orders in advance to prevent contract orders from being forcibly liquidated.



Contract cooling period: If you are concerned about your ability to control your actions during contract trading, the exchange offers a feature called 'contract cooling period,' which can be set for up to 30 days. During the cooling period, you will not be able to conduct any contract trading.

Furthermore, we need to clearly understand our sources of income. We are not trading the spot or digital currencies themselves, but rather contracts. When an investor buys a contract, the counterpart is the seller; when an investor sells a contract, the counterpart is the buyer. Therefore, our profits or losses actually come from other investors participating in contract trading.