For the past week, Bitcoin (BTC) price has been flirting with the $20,000 mark, which has led some traders to lose their patience. In the eyes of some traders, the lack of bullish momentum is problematic, especially considering that BTC tested the $16,200 level roughly a week ago.
Experienced traders know that there are key indicators that serve as telling signs of a trend reversal. These are volumes, the futures premium, and top traders’ positions at major exchanges.
A handful of negative indicators will not precede every dip, but there are some signs of weakness more often than not. Every trader has their own system, and some will only act if three or more bearish conditions are met, but there is no set rule for knowing when to buy or sell.
Futures contracts should not trade below spot exchanges
Some websites host trading indicators that claim to show the long-to-short ratio for various assets, but in reality, they are simply comparing the volume of the bids and offers stacked.
Others will refer to the leaderboard data, therefore monitoring accounts that did not opt-out from the ranking, but this is not accurate.
A better method is to monitor the perpetual futures (inverse swap) funding rate.
The open interest of buyers and sellers of perpetual contracts is matched at all times in any futures contract. There is simply no way an imbalance can happen, as every trade requires a buyer (long) and a seller (short).
Funding rates ensure there are no exchange risk imbalances. When sellers (shorts) are the ones demanding more leverage, the funding rate goes negative. Therefore, those traders will be the ones paying up the fees.