When more traders are long than short, longs pay shorts. This usually happens when the market is euphoric and perpetual prices trade above spot. High positive funding is often a sign of overheated long positioning.
When more traders are short than long, shorts pay longs. This typically happens during fear-driven sell-offs when perpetual prices trade below spot — a contrarian signal that shorts may be overcrowded.
Extremely high positive funding (0.1%+ per 8 hours) often precedes long squeezes. Extremely negative funding often precedes short squeezes. Watching funding rates can reveal when a market is dangerously one-sided.
If you hold a leveraged long for a week during high positive funding, the cumulative fee can be 2-5% of your position — separate from price movement. Factor funding cost into any multi-day leveraged position.
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