Crypto Futures Algo Trading Explained: Leverage, Funding, Risk

Most crypto algo trading happens on perpetual futures, not on the coins themselves. A perpetual future is a contract that tracks a coin's price and never expires. It lets a strategy profit from a falling market as well as a rising one, and it lets you trade with more than you hold. Both of those cut both ways, so it is worth understanding them before any strategy runs on your account.

Why strategies use futures instead of spot

• Both directions: a strategy can go long when its rules expect a rise and short when they expect a fall. On spot you can only buy and sell what you own.
• Capital efficiency: you post margin instead of paying the full value of the position.
• No coin handling: nothing to move between wallets or store. A position is opened and closed in the same account.

Long and short

A long position gains when the price rises. A short position gains when it falls. A strategy that can do both is not waiting for a bull market to be useful, which is the main reason every published AlgoPulse strategy trades perpetuals.

Leverage and margin, with numbers

Margin is the money you put up. Leverage is how many times larger the position is than that margin. With 1,000 USDT of margin and 5x leverage, the position is worth 5,000 USDT.

• The price moves 2% in your favour: the position gains 100 USDT, which is 10% of your margin.
• The price moves 2% against you: the position loses 100 USDT, also 10% of your margin.
• At 5x, a move of roughly 20% against you is enough to consume the whole margin. At 20x, roughly 5% is.

Leverage does not make a strategy better. It makes every result bigger. The same strategy at 3x and at 15x has the same win rate and five times the swings.

Liquidation

If losses bring your margin down to the exchange's maintenance level, the exchange closes the position for you. That is liquidation, and it usually costs an extra fee. It happens before the margin reaches zero, so the real distance to liquidation is a little shorter than the simple arithmetic above suggests.

Funding

Because a perpetual never expires, exchanges use a funding payment to keep its price close to the coin's real price. Every few hours, traders on one side pay traders on the other. If you hold a position through a funding time you either pay or receive a small percentage of its value. For a strategy that holds for days, funding is a real cost or a real income and belongs in the backtest.

Which currency your margin is in

• USDT-margined: margin, profit and loss are in USDT. CoinDCX, Shark Exchange, CoinSwitch PRO and Bybit work this way.
• USD-settled: Delta Exchange India settles its perpetuals in USD.
• INR-margined: Pi42 offers perpetuals where margin and results are in rupees.

The strategy is the same in each case. What changes is what you deposit and what your profit and loss is counted in. Each exchange's page under supported exchanges says which applies.

What changes when a strategy is automated

• Minimum order size: each trade must clear the exchange's minimum. Investment, leverage and position size together decide whether it does.
• The futures wallet: a strategy can only use money in the futures wallet. A balance elsewhere reads as zero.
• Fees add up: an active strategy pays the trading fee on every entry and exit. A backtest that leaves fees out is flattering.
• It runs while you sleep: so the size has to be one you are comfortable with when you are not watching.

Our guide to position sizing and leverage works through how much is at stake on each trade for a given set of settings.

A sensible way to begin

1. Read the strategy's backtest and note its maximum drawdown.
2. Choose leverage low enough that the worst drawdown in the report would not have come near liquidation.
3. Size the first deployment at the smallest amount that clears the minimum order.
4. Watch it through a losing stretch before adding more.