Last time, we covered how funding rates work. Today, we’ll look at how to use them as a sentiment thermometer.
【State 1: Funding rates persistently high and positive】This means longs are crowded, with everyone borrowing money to go long. At this point, the market
is often accelerating toward a blow-off top, and a sharp drop from a “long squeeze” could happen at any moment. I’m not telling you to immediately
short, but rather: be especially cautious about going long at this stage, and tighten your stop-loss.
【State 2: Funding rates persistently negative】Shorts are crowded. Extremely negative funding rates often occur near panic-driven market bottoms,
because everyone who was going to run has already run, yet people are still shorting. Many major rallies in the past have started at times like these.
【State 3: The funding rate is hovering around zero】Longs and shorts are balanced, and the market is waiting for a direction. At times like this, trend
strategies are best left on the sidelines; range-trading or waiting is more appropriate.
【Reminder】The funding rate is a thermometer, not a steering wheel. It tells you who’s crowded right now, but not whether the next
candlestick will rise or fall. Look at it alongside your technical signals, and don’t use it as the sole basis for trading decisions.
What do you think? Share your experiences in the comments.