Trading 101 - How to trade Crypto Futures on Binance

Binance offers cryptocurrency perpetual futures contracts for BTC/USDT and ETH/USDT, complementing their existing spot trading pairs.
These futures products are designed to mimic the spot market's pricing and settings for ease of use. All futures products on Binance require USDT as collateral and are priced in USDT.

1. Futures Contract Mechanics

Unlike traditional spot markets where prices are settled instantly, futures markets involve two counterparties making a trade on a contract with settlement on a future date (when the position is liquidated). Traders do not directly buy or sell the underlying commodity but rather a contract representation.

2. Leverage and Margin

Binance allows for highly leveraged trading through a sophisticated risk engine and liquidation model.

Leverage Selection: Traders select their desired leverage, which in turn determines the initial margin requirement. The system displays the maximum allowable position size for different leverage levels.
Dynamic Leverage: The maximum allowed leverage depends on the position size; larger positions are subject to lower leverage.
Margin Checks: To open a new trade, margin checks are performed against the collateral.
Hedging: Leverage allows traders to hedge spot or holding risk with relatively small capital outlays in the futures market.
Maximum Leverage: Binance Futures offers up to 125x leverage.

2.1 Initial Margin (IM)

Definition: The minimum collateral required to open a new position. Your collateral must be greater than the Initial Margin.
Calculation: Initial margin openings are always calculated using the leverage selected by the trader.
Formula: $Initial Margin = \frac{Notional Value of Position}{Leverage}$

2.2 Maintenance Margin (MM)

Definition: If your $collateral + unrealized profit and loss$ falls below your Maintenance Margin, auto-liquidation will be triggered.
Purpose: It is the point where auto-liquidation will occur. Traders are strongly recommended to liquidate their positions before reaching this point to avoid higher auto-liquidation fees.
Calculation: Maintenance Margin is always calculated the same way, regardless of the leverage selected by the trader. Moving between position size brackets does not change the leverage for previous brackets.
Maintenance Amount Formula: $Maintenance Amount = [Floor of Position Bracket on Level n \times (Maintenance Margin Rate on Level n - Maintenance Margin Rate on Level n-1)] + Maintenance Amount on Level n-1$
Relationship with Initial Margin: The maintenance margin is typically much less than half the initial margin, leading to a more favorable liquidation price.
Risk Adjustment: Risk and leverage are adjusted based on the customer’s total exposure. Larger total positions require higher maintenance margins and result in lower effective leverage.

3. Collateral and PnL

Collateral: All futures products on Binance require collateral in the form of USDT.
Withdrawal: Collateral can be withdrawn from the account as long as $collateral > initial margin$ . Collateral cannot be withdrawn if it falls below the initial margin.
Net Collateral: $Net Collateral = Initial Collateral + Realized PnL + Unrealized PnL$

3.1 Realized PnL

Definition: Based on the actual executed market prices of closed positions.

3.2 Unrealized PnL

Calculation Basis: Used for all PnL and margin calculations, and is based on the Mark Price to prevent market manipulation and unnecessary liquidations.
For Net Positive Position (Long): $Unrealized PnL = (Mark Price - Initial Buy Price) \times Position Size$
For Net Negative Position (Short): $Unrealized PnL = (Initial Sale Price - Mark Price) \times Position Size$

4. Liquidation

A liquidation is triggered when $Net Collateral < Maintenance Margin$ .

Liquidation Process:
1. Cancel Open Orders: The system first cancels all of the trader’s open orders.
2. Attempt to Reduce Margin Usage: The system then attempts to reduce the trader’s margin usage with one single large Immediate or Cancel (IOC) order without fully liquidating the trader. This order is issued at the bankruptcy price.
3. Margin Check: A margin check occurs after the IOC order is filled. If the trader is margin compliant (even after a liquidation fee), the liquidation event ends.
4. Bankruptcy/Insurance Fund Involvement: If the trader is still margin deficient, the Insurance Fund will take over the position, and the trader is declared bankrupt.
Liquidation Fee: A fee is charged on the amount liquidated (not the notional value of the position) for forced liquidations:
- BTC/USDT perpetual contract: 0.3%
- ETH/USDT and BCH/USDT perpetual contracts: 0.5%
Bankruptcy Price (IOC Price): This is the price at which liquidation orders are issued. $Bankruptcy Price = \frac{Initial Collateral}{Leverage}$
Insurance Fund: Accumulates USDT reserves from liquidation fees above the bankruptcy price. Its purpose is to cover losses when client accounts go below zero after all liquidation attempts.
Auto-Deleveraging (ADL): If the Insurance Fund is insufficient, ADL may be triggered, impacting profitable traders by deleveraging their positions. (While not explicitly detailed in the provided text, ADL is a common mechanism in highly leveraged futures markets to prevent systemic risk when the insurance fund is depleted. It's a useful concept to add for completeness).
Partial Liquidation: The system attempts to liquidate only the necessary notional value to meet margin requirements. If the post-liquidation notional value is not within the current maintenance margin bracket, a new liquidation price will be calculated based on the new position size.
Smaller vs. Larger Users: Larger leverage users may see a smaller percentage of their accounts liquidated compared to smaller users because maintenance margin is based on position size, not leverage selection. For smaller users, the effective maintenance margin might be lower than the liquidation fee rate, leading to bankruptcy earlier in the liquidation process.

5. Order Types

Market Order: An order executed immediately at the best available price.
Stop-Market Order: An order that triggers a market order when the stop price is reached.
Stop-Limit Order: A conditional trade that triggers a limit order when the stop price is reached. Once the stop price is reached, a limit order to buy or sell at the specified limit price (or better) is placed on the order book.
- Stop Price: The price that triggers the stop-limit/market order. By default, this is the "Last Price" but can be set to "Mark Price."
- Limit Price: The user-defined price for the limit order.
- Recommendation: For sell orders, set the stop price slightly higher than the limit price. For buy orders, set the stop price slightly lower than the limit price to increase the chance of execution.
Immediate or Cancel (IOC) Order: An order that attempts to fill as much as possible at the given price and cancels any remaining unfed portion. All orders for liquidations are IOC orders.
Fill or Kill (FOK) Order: An order that must be completely executed or cancelled entirely. (Though mentioned, its direct application in user trading is not as emphasized as IOC for liquidations).

6. Perpetual Contracts

Definition: An attempt to mimic the behavior of the spot market while taking advantage of the non-delivery aspect of futures contracts, aiming to reduce the price gap between the futures price and the Mark Price.
No Expiration: Unlike traditional futures, perpetual contracts have no expiration or settlement date.
Price Convergence Mechanism: Binance uses a funding rate system to encourage the futures market price to converge to the "Mark Price."

7. Mark Price and Index Price

Mark Price: Used to calculate unrealized Profit and Loss for all traders to avoid market manipulations and ensure the perpetual contract is price-matched to the Spot Price. It is considered a better estimate of the "true" value of the contract and prevents unnecessary liquidations. $Mark Price = Index Price \times (1 + Basis)$
Index Price: A weighted average of prices from major spot market exchanges, serving as the primary component of the Mark Price.

8. Funding

Definition: Payments exchanged between all long and short positions in the Perpetual Futures Market every 8 hours (at specific times).
Purpose: Essential for forcing convergence of prices between the Perpetual Futures Market and the actual underlying commodity (e.g., BTC/USDT).
Payer/Payee:
- If the Funding Rate is positive, longs pay shorts.
- If the Funding Rate is negative, shorts pay longs.
Liability: Traders are only liable for funding payments if they have open positions at the pre-specified funding times.
Funding Amount: $Funding Amount = (Nominal Value of Positions) \times Funding Rate$
- Note that nominal position can be up to 125 times margin, making the funding amount potentially large.
Binance Fees: Binance takes no fees for Funding Rate transfers; these are directly between traders.
Funding Rate Components:
1. Interest Rate (I): A flat interest rate component, typically 0.01% per funding interval (0.03% per day by default). This assumes holding cash equivalent returns a higher interest than BTC equivalent.
2. Premium Index (P): Enforces price convergence between the Perpetual Contract and the Mark Price. $Premium Index (P) = \frac{Max(0, Impact Bid Price - Mark Price) - Max(0, Mark Price - Impact Ask Price)}{Spot Price}$
  - Impact Bid Price: The price to buy the Notional Impact.
  - Impact Ask Price: The price to sell the Notional Impact.
  - Notional Impact: The amount in USDT available to trade with 200 USDT worth of margin (default 4,000 USDT).
  - Binance calculates the Premium Index every second and uses a time-weighted average to the funding time.
Funding Rate Formula: $Funding Rate (F) = Premium Index (P) + clamp (0.01% - Premium Index (P), 0.05%, - 0.05%)$
- If $(Interest Rate (I) - Premium Index (P))$ is within ±0.05%, then $F = P + (I - P) = I$ . In this case, the Funding Rate will equal the Interest Rate (0.01%). This means as long as the Premium Index is between -0.04% to 0.06%, the Funding Rate will be 0.01%.
Maximum Funding Rate: Cannot exceed 0.5% regardless of circumstances.
Basis: $Basis = Funding Rate \times (Time Until Funding /8)$

9. Position Management

One Position per Trading Pair: Traders are allowed only one position (either long or short) per trading pair. It is not possible to simultaneously open long and short positions for the same pair, as they would cancel each other out.
Futures vs. Spot Prices: Futures prices differ from spot market prices due to carrying costs and carrying returns. While funding rates encourage long-term convergence, short-term price differences can still be significant.

10. Margin Mode

Cross Margin: All contracts and positions are in "Cross Margin" mode by default.
Change Restriction: You cannot change the margin mode if you have any open orders or positions.

11. Risk Management

Sophisticated Risk Engine: Binance employs a sophisticated risk engine and liquidation model to manage highly leveraged trading.
Order Rejection: The system automatically rejects orders that fail margin checks or exceed position limits.

12. Binance Futures Calculator

Binance provides a Futures Calculator to estimate initial margin, profit & loss (PnL), return on equity (ROE), and liquidation price before placing orders.

13. Example of Liquidation Calculation

Initial Collateral (IC): $50,000
BTC Price (BTC): $10,000
Leverage (L): 20x
Initial/Max Position (IP): 1,000,000(\text{IC} \times \text{L} = 50,000 \times 20$)
Required Maintenance Margin (MM): $8,700

When BTC price falls to the Liquidation Price (LP):

$LP = \frac{Initial Collateral}{Leverage - 1} = \frac{50 , 000}{20 - 1} \approx 9, 587$ (This formula for LP seems to be a specific example provided for a scenario leading to "Loss of Initial Collateral", not the generic liquidation price which is related to NetCollateral < Maintenance Margin.)

If BTC price falls below $9,587:

Loss of Initial Collateral (LIC): $IC - MM = 50, 000 - 8, 700 = $41, 300$
Reduction in Initial Position (RIP): $IP - LIC = 1, 000, 000 - 41, 300 = $958, 700$ exposed.
Final Collateral Left: Equal to MM ($8,700).
Bankruptcy Price (BP): $LP - (0.01 \times MM) = 9, 587 - (0.01 \times 8, 700) = 9, 587 - 87 = $9, 500$ (This calculation illustrates a specific bankruptcy price in a complex scenario leading to partial liquidation/reduction.)