What is Binance contract trading?
Binance contracts are a form of financial derivatives trading, which sounds complicated, but can be simply understood as a trading method that allows you to profit from predicting price changes without actually buying coins. During the process of rising and falling, investors can use leverage to amplify their funds to obtain greater profits (while also bearing greater risks).
Unlike spot trading, contract trading uses 'margin' for transactions, so you don't need to actually hold or sell a specific cryptocurrency. Therefore, investors do not need to wait for a cryptocurrency to rise to make money like in spot trading, but can profit from the market through long (bullish) or short (bearish) contract trading.
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Binance Contract Trading Interface
In Binance contract trading, U-based and coin-based are two different contract trading mechanisms, mainly differing in the types of margin used and the settlement methods.
U-based: In this contract mode, USDT or USDC is used as margin, and the currency you used to open the position (for example, if you opened the position with USDT, then the profits and losses will be settled in USDT). This means that you only need to pay attention to the value fluctuations of USDT, making the calculations relatively simple and suitable for beginners.
Coin-based: In the coin-based mode, margin is collateralized with cryptocurrencies (such as BTC, ETH), and profits and losses will be settled based on the cryptocurrencies you invested when opening the position. This mode requires you to bear the price fluctuation risks of the selected cryptocurrency, making the calculations somewhat more complex.
If you are a beginner, it is recommended to first choose the U-based mode for contract trading, as this method of calculation is more intuitive and the risk is relatively lower.
The various functions in the chart will be detailed later in the article.
Binance Contract Order Placement Tutorial
Assuming I expect BTC to rise back to $100,000, and I want to go long on BTC with 10x leverage, I would first select the BTCUSDT trading pair and set it to cross margin mode, then set the leverage to 10x and place the order at market price. At this point, I will see the long position in BTC.
The difference between limit orders and market orders is listed in the table below:
Limit Order and Market Order Order Placement Method Set a specific price, and when the price is reached, it will be executed immediately at the current market's best price. Advantage of Placing Orders Better cost price, low transaction fees Fast execution, not afraid of missing market conditions Disadvantage of Placing Orders May miss market conditions due to not filling orders. Low liquidity may cause slippage, and transaction fees may be higher. Applicable Situations Traders who want to buy or sell at a specific price Traders who want immediate execution and do not want to wait.
Binance Contract Trading Pair
In Binance contract trading, you can choose different trading pairs to trade. In simple terms, the trading pair determines which currency you use to trade which asset. For example, BTCUSDT represents contract trading with BTC as the underlying asset, while the margin and profits/losses are settled in USDT, and similarly for ETHUSDT and other trading pairs.
Changing the trading pair is also very simple. Investors can select the trading pair in the contract trading interface (as shown in the left red box), allowing them to choose their preferred trading pair. If the target you want to invest in is not in that menu, you can directly search for it in the search bar above.
Binance also offers perpetual contracts and delivery contracts for investors to use. The general differences are listed in the table below:
Perpetual contracts have no expiration date and can be held indefinitely. Investors need to pay attention to the funding rates, which can lead to additional losses/profits over the long term. The settlement method without funding rate mechanisms can simply be closed manually, and will not be forcibly liquidated at expiration.
If you are not familiar with contracts, it is recommended to use perpetual contract trading to avoid the issue of automatic settlement of positions at expiration.
Binance Contract Cross and Isolated Margin Settings
In Binance contract trading, the margin is divided into two different settings: 'cross margin' and 'isolated margin'. This relates to how the system will operate when your account incurs losses, which will greatly affect the upper and lower limits of your losses. In the worst-case scenario, cross margin mode could bring your contract account to zero, while isolated margin mode would only result in the loss of the margin for that specific position.
Cross Margin Mode (Putting all the money in one basket)
Shared Margin: All positions share the available funds in the account as margin.
Reduce liquidation risk: If a position is facing liquidation, the system will automatically use your other funds to cover it.
May lead to total loss of funds: If there is a significant market change, all positions may get liquidated at once, and the contract account could instantly be zero!
Isolated Margin Mode (Independently Structured, Risks Controlled)
Independent Margin Calculation: One trade's liquidation will not affect other trades.
Maximum Loss is Limited: The worst-case scenario is just losing the margin for that trade, not wiping out the whole contract account.
Can Increase Margin: If you're worried about liquidation, you can manually add margin to support your position.
If you are just starting with contract trading and are unsure how to manage your positions, it is recommended to first use isolated margin mode for trading, as its risks are easier to control, preventing you from accidentally losing your entire contract account!
Binance Contract Leverage Setting Tutorial
"Leverage" is a feature of contract trading that allows you to "play big trades with small money", providing an opportunity to amplify profits, but at the same time, the risks will also increase, so special care is needed when using it!
As shown in the image below, investors can click on the red box to adjust the leverage, which is usually represented as x. The 1x in the image represents one times leverage. Each exchange has different leverage limits for each cryptocurrency; Binance supports up to 125x leverage for BTCUSDT contract trading.
Advantages of Leverage
Increase Capital Efficiency: Participate in large transactions with a small amount of capital.
Amplified Profit: If the direction is judged correctly, the returns will multiply.
Flexibility: Allows investors to engage in both long (bullish) and short (bearish) trades, increasing profit opportunities.
Disadvantages of Leverage
Amplified Loss: If the direction is wrong, losses will also be amplified.
Liquidation Risk: When losses exceed your margin, the system will force liquidation and you will lose all your margin.
It is recommended for investors who are new to contract trading to trade with 1-3 times leverage, so that even in extreme market conditions, the account can face smaller losses.
Using the aforementioned 10x leverage, liquidation will occur as soon as BTC reaches around 79,764 (about a 10% drop), resulting in total loss of margin. Therefore, it is relatively dangerous in the highly volatile cryptocurrency market. Once again, I urge investors who are new to contracts to trade with 1-3 times leverage.
Introduction to the Binance Contract Order Book
The contract order book is where the current trading orders are displayed, helping investors understand the liquidity and price trends in the market. Investors can also adjust the price interval displayed on the order book themselves.
In Binance contracts, the common price types include 'Mark Price' and 'Last Price', which respectively affect the liquidation price and the consensus price during trading. The following table analyzes the differences between the two prices.
Mark Price (Mark Price) Last Price (Last Price) Definition Reasonable price calculated by the system The latest transaction price Usage Forced liquidation is based on the mark price Trading (market price, limit price) is based on the latest price Price Source Spot price + funding rate + price volatility Determined by matching orders in the order book Update Frequency The system dynamically adjusts to avoid market manipulation and updates in real time when the order book changes.
When we buy at market price, we need to match the order based on the latest price on the seller's order book, and there may be slight slippage, so when opening a position the BTC price is 88,329, but our average holding price is at 88,322.
What is Binance Contract Margin?
Margin is similar to the investor's "deposit", which is the capital you use to maintain your position. As mentioned earlier, you are not actually buying Bitcoin, but using this margin for trading. Binance offers two types of margin models for investors to choose from: single currency margin mode and combined margin mode.
Single Currency Margin Mode: Only USDT is accepted as margin, and profits and losses can only offset within the same asset position, supporting both cross and isolated margin modes.
Combined Margin Mode: USDT + other cryptocurrencies can be used as margin, and profits and losses can offset between different assets, only supporting cross margin mode.
So how do we know how much margin is needed to open a position?
Margin requirement is the position value divided by leverage. For a long position of BTC using 10x leverage, we opened 0.002 BTC when the price was around 88,329. Multiplying the price by the quantity 0.002 is approximately 176 USDT; however, since we opened with 10x leverage, the margin requirement is only one-tenth, about 17 USDT.
How is the Binance margin rate calculated?
For our opened BTC 10x long position, the maintenance margin rate for BTCUSDT in Binance's announcement is 0.4%, so the maintenance margin for this position is approximately 88329*0.002 (quantity)*0.4% = 0.7. Dividing the maintenance margin by the position margin gives us the current margin ratio of approximately 3.98%, which matches the margin ratio displayed for the position.
Binance Contract Liquidation Calculation
Liquidation (Clearing, Forced Liquidation) refers to the mechanism where the system forcibly closes positions and confiscates margins when the margin is insufficient to maintain the position. Learning about liquidation calculations will help investors avoid unnecessary losses.
Liquidation occurs when the margin rate is greater than or equal to 100%. This can be calculated using the margin formula above. If investors are not familiar with the calculation concept, it’s okay; after you start contract trading, Binance will display the liquidation price in your position. During liquidation, Binance will charge traders a liquidation fee based on the percentage of the liquidated assets.
Margin Mode Ratio Transaction Fee Basic Cross Margin Leverage Standard Mode 2% Liquidation Asset Isolated Margin Leverage Mode 2% Liquidation Asset Cross Margin Professional Mode 3% Liquidation Asset
Investors can avoid liquidation through the following methods:
Set stop-loss properly: At least set the stop-loss before the liquidation price to avoid extra fees.
Lower leverage: Reducing leverage will help investors lower liquidation risk.
Supplement margin: Manually adding margin can also help investors stay away from liquidation risk.
Binance Contract Take Profit and Stop Loss Settings
In Binance contract trading, investors can use take profit (TP, Take Profit) and stop loss (SL, Stop Loss) to manage risks and profits. Simply put, take profit sets a target price, and when the market price reaches that level, the system automatically sells to lock in profits; stop loss aims to prevent losses from expanding, and when the market price drops to the set stop loss price, the system automatically closes the position to prevent larger losses. The setting order is as follows:
Click to set take profit/stop loss.
Enter the take profit and stop loss prices.
When the price reaches the set level, the strategy will automatically execute and close the position.
Assuming I want to take profit when Bitcoin rises to $100,000 and set a stop loss when it drops to $80,000, this can just stop loss before liquidation, so I will set it as shown in the picture below.
Binance Contract Closing Tutorial
In Binance contract trading, in addition to setting take profit and stop loss, investors can also click 'Close' on their position, and the system will close the position at the best market price currently available.
After closing the position, it is shown in the image below; when the original position disappears, it indicates that the position has been successfully closed.
How much is Binance Contract Transaction Fee?
For general users, the Maker transaction fee for Binance contract trading is 0.02%, while the Taker is 0.05%. It should be noted that opening and closing positions each incur a transaction fee, so if the transaction is entirely by Taker, the total transaction fee for that order will be 0.1%.
Maker is placing an order and Taker is taking the order. In simple terms, when you place an order and wait for it to be filled, as long as the order enters the order book and waits to be filled, you will be counted as a Maker, with relatively lower transaction fees. If you directly use a market order (immediate execution) to buy or sell, then you are considered a Taker, and the transaction fee will be slightly higher than that of a Maker.
Some people think that limit orders are always Makers, but if your limit order price is close to the market price and results in immediate execution, it will still be counted as a Taker. This is something to pay special attention to.
How to save on transaction fees?
BNB Discount: Using the platform's currency BNB to pay transaction fees can reduce the fee by 10% (90% off).
VIP Level: Upgrading your Binance VIP level will help reduce transaction fees.
You can refer to the following chart for the transaction fees for each VIP level:
What is the funding rate for Binance contracts?
The funding rate is a mechanism used in Binance perpetual contracts to ensure that spot prices and contract prices remain close to each other. Since perpetual contracts do not have an expiration date, without the influence of funding rates, there could be significant price discrepancies between contracts and spot. The funding rate is usually charged every eight hours (at 0, 8, and 16), but it may be adjusted to every four hours or even two hours due to new coins or significant price discrepancies.
The funding rate is not paid to the exchange but is a fee paid between investors. If the rate is positive, longs need to pay the funding rate to shorts, and vice versa. The logic and arbitrage methods of the funding rate can be referenced: Mastering the funding rate, a detailed analysis of arbitrage logic.
Explanation of Binance's Automatic Deleveraging Mechanism
Automatic Deleveraging (ADL) is a mechanism designed by Binance to prevent investors from incurring excess losses due to extreme market fluctuations. When the market experiences extreme conditions and some positions' losses exceed the margin, while there are not enough counterparties in the market to take on these loss positions, the exchange will activate the ADL mechanism to ensure that investors do not incur excess losses.
The automatic deleveraging mechanism is not limited to extreme market conditions; if a cryptocurrency lacks investor trading leading to insufficient liquidity, it may also lead to ADL situations. Binance will prioritize reducing positions for users with high leverage and high unrealized gains. If your automatic deleveraging signal is about to be full, be sure to monitor whether you will be automatically deleveraged by Binance.
Frequently Asked Questions
Why can't I trade after just creating a Binance account?
It may be because your funds are not placed in the contract trading account; you can use the transfer function to move funds in. Alternatively, when you first create an account, Binance conducts a simple Q&A for investors to ensure they understand contract trading well enough to use it.
Why can't I trade even though there are funds in my contract account?
Each cryptocurrency has a minimum order limit, and the margin * leverage of the investor must exceed the minimum limit to open a position.
Is there a time limit for Binance contract trading?
No, Binance contract trading is open 24/7 and does not have time restrictions.
Is there a way to view transaction records after closing a position?
Yes, investors can view past transaction orders, trading profits and losses, transaction fees, and other information in the order and transaction history, making it convenient to check any information about past contract trades.
Conclusion
Contract trading, as a tool, can indeed help investors seize opportunities from market fluctuations and amplify profits through leverage. However, it is important to remind that this high-yield investment tool also hides high risks, especially during periods of extreme market volatility, where investors may face significant losses in a short time, even leading to liquidation. Therefore, investors must fully understand the operational principles of contracts and establish risk management strategies before using contract trading to survive better in the market.
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