How does the Poloniex perpetual contract work?

Poloniex perpetual contracts provide traders the ability to speculate on cryptocurrency price movements without expiration dates, enabling them to maintain positions indefinitely.

Nov 26, 2024 at 11:52 pm

Understanding Poloniex Perpetual Contracts: A Comprehensive Guide

Introduction

Poloniex perpetual contracts are financial instruments that allow traders to speculate on the price movements of cryptocurrencies. Unlike traditional futures contracts, perpetual contracts have no fixed expiration date, enabling traders to hold positions indefinitely. This article aims to provide a thorough understanding of how Poloniex perpetual contracts work, encompassing key aspects such as trading mechanisms, risk management, and order types.

Steps to Trade Poloniex Perpetual Contracts

1. Open an Account and Fund Your Wallet

• Register for a Poloniex account and complete the verification process.
• Deposit funds into your Poloniex wallet in supported cryptocurrencies (e.g., USDT, BTC, ETH).

2. Choose a Perpetual Contract

• Navigate to the "Perpetual" tab in the Poloniex trading interface.
• Select the cryptocurrency pair you wish to trade (e.g., BTC-USDT, ETH-USDT).

3. Set Trading Parameters

• Determine the contract size, which represents the notional value of the underlying cryptocurrency.
• Specify the leverage you want to apply (no leverage, up to 100x). Leverage magnifies potential profits but also increases risk.
• Choose an order type (limit, market, conditional). Limit orders allow you to define a specific price for execution.

4. Place an Order

• Enter the contract size, desired price (for limit orders), and leverage.
• Preview the order details and click "Buy/Long" or "Sell/Short" to execute the trade.

5. Monitor and Manage Your Position

• Track your open position's performance through the "Positions" tab.
• Adjust the leverage or close the position as needed to manage risk and seek profit.

Understanding the Perpetual Contract Mechanism

• Perpetual Contracts vs. Futures: Perpetual contracts differ from futures contracts in that they do not have an expiration date. This allows traders to maintain open positions indefinitely, avoiding the need to roll over contracts or incur expiration-related fees.
• Mark Price: The mark price is the real-time, fair value of the underlying asset. It is calculated based on weighted average prices from multiple spot exchanges to provide a reliable reference point.
• Funding Rate: Funding rates ensure that perpetual contract prices remain aligned with spot prices. When the perpetual contract's price diverges significantly from the mark price, the funding rate is applied, meaning that long positions pay short positions (when the contract price is higher than the mark price) or vice versa.

Risk Management and Leverage

• Leverage: Leverage allows traders to increase their potential profit or loss by amplifying their exposure to the underlying asset. However, it is essential to exercise caution, as leverage can lead to significant losses if the market moves against the trader's position.
• Margin and Margin Call: Margin refers to the minimum amount of funds you need to maintain in your account to cover any potential losses. A margin call occurs when your account balance falls below the required margin, requiring you to either add funds or close your position to avoid liquidation.
• Liquidation: Liquidation is the forced closure of a position when the account balance falls below the margin requirement. Traders facing liquidation may lose their entire invested capital.

Order Types and Execution

• Limit Order: A limit order specifies a specific price at which the trade will be executed. It offers greater control over the execution price but may not be filled if the market moves against the trader's expectation.
• Market Order: A market order executes the trade at the best available price in the market. It ensures immediate execution but may not provide the desired price point.
• Conditional Order: Conditional orders allow traders to set specific triggers for entering or exiting trades. For example, a stop-loss order automatically sells a position at a predefined price to limit potential losses.