Last time, we discussed how funding rates work. Today, let’s look at how to use them as a sentiment thermometer.
【State 1: Funding rates remain highly positive】This means longs are crowded, with everyone borrowing money to go long. At this point, the market
is often in the final, accelerating phase of a rally, and a sharp “long squeeze” could happen at any moment. I’m not telling you to immediately
short, but rather: be especially cautious about chasing longs at this stage, and tighten your stop-loss.
【State 2: Funding rates remain negative】Shorts are crowded. Extremely negative funding rates often appear near panic bottoms,
because everyone who needed to get out already has, yet people are still shorting. Many major rallies have historically started at times like this.
【State 3: The funding rate is hovering around zero】Longs and shorts are balanced, and the market is waiting for direction. At times like this, trend
strategies are best left on the sidelines; range trading or simply waiting is more suitable.
【Reminder】The funding rate is a thermometer, not a steering wheel. It tells you who’s crowded right now, but it doesn’t tell you whether the next
candlestick will rise or fall. Look at it alongside your technical signals—don’t use it as your sole basis for buying or selling.
What do you think? Share your experience in the comments.