Trading glossary
Funding rate
By the PatternX team · Published
Definition
The funding rate is a periodic payment between holders of long and short positions in a perpetual futures contract, designed to keep the contract's price close to the spot price. When it is positive, longs pay shorts; when negative, shorts pay longs.
How it works
Perpetual futures never expire, so there's no settlement date to pull their price back to spot. Funding does that job. The exchange calculates a rate from the gap between the perpetual's price and a spot index, often with a small interest component, and traders exchange payments at fixed intervals, often every 8 hours, though some venues settle hourly.
Funding payment = position notional × funding rate
You pay or receive funding only if you hold a position at the funding time. On most venues the payment passes between traders rather than to the exchange.
Why it matters
- Holding cost: a position held through many intervals pays or earns funding each time.
- Positioning: a persistently high positive rate means longs are paying up to stay long, a sign of crowded positioning; deeply negative rates suggest the reverse. Crowded positions can unwind sharply.
- Context, not timing: funding can stay elevated for long periods, so on its own it's a weak entry signal.
Example
For example, you hold a hypothetical $10,000 long with a funding rate of +0.01% per 8 hours. You pay $1 each interval, $3 a day, or about $90 over 30 days if the rate held. At +0.10% per interval the same position would pay $30 a day.
Common mistakes
- Ignoring funding when backtesting trades held for days.
- Reading one funding print as a forecast.
- Applying the idea to markets that don't have it: spot crypto and stocks pay no funding.
How PatternX uses it
PatternX's crypto support is built around perpetual futures, and funding appears in three places. The PatternX Score includes a funding factor with a weight of .03. In PatternX AI (Pro and Elite), the sentiment factor of the context layer uses the perpetual-futures funding rate only, and is neutral for stocks and FX. PatternX backtests always charge funding at 0.01% per 8 hours. More on the market itself in perpetual futures pattern trading.