How to Enable the Futures Price Protection Function?

2020-10-29 07:47

What is Price Protection in Futures?

Price Protection protects your open orders from extreme market movements and abnormal trading activities. For instance, when the Last price and the Mark Price of a Futures contract exceeds a predetermined threshold, the Price Protection function will prevent the stop-loss or take-profit order from being triggered.

You can enable/disable the Price Protection function for individual order. You’ll only see the Price Protection function on the trading interface when it’s activated. Please note that orders placed via API won’t be affected by the Price Protection function.

You can view the Price Protection threshold in the Trading Rules.

How does Price Protection work?

Let’s assume the current BTCUSDT price is at 25,000 USDT. You decide to set up a limit buy order at 25,500 USDT and schedule a take-profit market order to sell when the price reaches the Mark Price at 26,000 USDT to secure profit.

The buy limit order will be triggered when the Last Price reaches 25,500 USDT, while the take-profit order will be triggered when the Mark Price reaches 26,000 USDT.

Important note: Last Price is the latest transaction price, while the Mark Price represents a calculated average, factoring in recent prices and market specifics, such as the Spot Price and the Funding Rate. For more details, please refer to What Is the Difference Between a Futures Contract’s Last Price and Mark Price?

Now, if extreme volatility pushes the Mark Price up to 27,125 USDT (an approximately 6.5% increase from the Last Price), here is what happens:

Without Price Protection: A 6.5% discrepancy between the Last Price and the Mark Price would have triggered your take-profit order prematurely. Your order could potentially be executed closer to the 25,500 USDT Last Price due to the inflated Mark Price. Consequently, you'd end up selling at around 25,500 USDT, missing the potential gains from your target of 26,000 USDT.
With Price Protection: Your take-profit market order with a 5% threshold, the system would block the order's execution when the Mark Price strays beyond 5% from the Last Price. Your Take Profit Market Order would stay in the order book, allowing it to be executed during more favorable market conditions.

Is Price Protection always a good strategy?

Price Protection is a valuable tool in many trading scenarios, but like all trading tools, its effectiveness depends on the trader's goals, strategy, and market conditions. Here are some considerations:

Pros:

Protect against abnormal market activities: If there's a sudden, unnatural price spike or drop, Price Protection can prevent your orders from being triggered at unfavorable prices.
More control over order execution: Your orders can be executed closer to the market's general consensus price, rather than being affected by short-lived anomalies.

Cons:

Missed opportunities: In fast-moving markets where the price change is genuine, Price Protection might prevent your orders from being executed. This means you could miss out on potential profit opportunities or risk-management exits.
Complexity: It adds another layer of decision-making to your trading process. You need to determine when it's beneficial to use it and when it might be an impediment.

While Price Protection can be a helpful feature to protect against extreme market anomalies, you should use it judiciously and in alignment with your overall trading strategy.

How to enable Price Protection?

Price Protection is available on the Binance website, app, and API. You can apply it to all order types and enable/disable it anytime.

If you want to activate Price Protection for both USDⓈ-M and COIN-M Futures, you'll need to configure it individually on their respective trading interfaces.