Perpetual Futures
vs Futures
Explained

A perpetual futures contract lets you go long or short on a market without owning the asset underneath it. That part works like any futures contract. If you buy and the price rises, you make money. If you sell and the price falls, you make money.

The difference is in the name. A perpetual never expires. There is no contract month, no last trading day and no settlement date, so a position stays open until you close it or the exchange closes it for you.

Perps started on crypto exchanges, and crypto is still where most perp trading happens. They are no longer only a crypto product. Perps now track equity indices, metals, energy and currencies, and regulated venues in the US have started to list them as well.

A futures contract needs some way to stay tied to the real price of what it tracks. A dated futures contract gets that from expiry, because at settlement the futures price and the spot price have to meet. A perp has no expiry, so it uses a different tool, the funding rate.

If you trade CME futures, the easiest way to understand a perp is to compare it to the contracts you already know.

The roll is the clearest difference. CME equity index futures expire on the third Friday of March, June, September and December, and CME lists the customary roll date as the Monday before that third Friday. The CME equity index roll dates page has the calendar. A perp never needs rolling, so the symbol you trade today is the same one you trade next year.

Sizing is the second difference you will notice. One MNQ moves 2 dollars per index point and one NQ moves 20, so your size goes up in fixed steps. A perp lets you size by dollar value instead, so a 7,500 dollar position is as easy to open as a 10,000 dollar one.

The funding rate is a small payment that passes between traders on opposite sides of a perp at set times. The exchange does not keep it. It moves from longs to shorts or from shorts to longs, depending on which way the perp is trading compared to the spot price.

• Positive funding. The perp is trading above spot, usually because more traders want to be long. Longs pay shorts.
• Negative funding. The perp is trading below spot. Shorts pay longs.

The payment pushes the perp back toward spot. When being long costs money, some longs close and some traders go short to collect the payment, and the gap narrows. Expiry does this job for a CME contract, and funding does it for a perp.

Most venues build the rate from two parts. A small fixed interest component sits underneath, and a premium component grows or shrinks with the gap between the perp and spot. Many venues settle funding every eight hours, while some settle hourly. On most venues you only pay or receive funding if your position is open at the moment it settles, and the payment is worked out on the value of your position at that time.

Say you hold a 20,000 dollar long and funding is 0.01 percent every eight hours.

• Each settlement costs you 2 dollars.
• Three settlements a day cost you 6 dollars.
• Thirty days cost you about 180 dollars.

That is small for a day trade and noticeable for a swing trade, and it can get much larger when the market is crowded on one side. Funding also changes on every settlement, so the rate you see when you enter is not guaranteed for the rest of the trade. Check it before you hold a position overnight or over a weekend.

On a CME contract the clearing house and your broker set a margin amount per contract, and your leverage follows from it. On a perp you usually choose the leverage yourself, up to a cap the venue sets for each market, and the margin follows from that.

Margin is the collateral you post to open the position. It is not a fee and it is not a loan. Leverage is how much exposure that collateral controls. Post 2,000 dollars at 10x and you control a 20,000 dollar position.

• Initial margin is what it takes to open the position.
• Maintenance margin is the minimum your position needs to stay open. Fall below it and the venue starts closing you out.

Leverage works in both directions. On that 20,000 dollar position, a 5 percent move in your favor makes 1,000 dollars, which is half your margin. A 5 percent move against you loses the same amount. At 10x with isolated margin, a move a little under 10 percent against you is enough to reach maintenance margin, and on a volatile asset that can happen in a single session.

Isolated and cross margin change that distance. With isolated margin, only the margin you put on that position backs it, so the numbers above apply. With cross margin, your whole account balance backs every position, which pushes liquidation further away but puts the whole balance at risk.

The CME version works the same way, but the leverage is less visible. An MNQ contract is worth the index level times 2 dollars, so at an index level of 30,000 one contract controls 60,000 dollars of exposure while the margin is a fraction of that. Perps print the leverage on the order ticket, so it is easier to see how much you are using.

Liquidation is when the venue closes your position because your margin has run too low to support it. You do not choose the price, and in a fast market the fill can come well past the liquidation level. On some venues a liquidation also carries an extra fee.

The higher your leverage, the closer liquidation sits to your entry. With isolated margin, at 2x the market has to move roughly 50 percent against you. At 10x it is under 10 percent. At 50x it is under 2 percent.

Futures prop traders already know a close cousin of this, the drawdown breach. When a funded account touches its loss limit, the firm closes the account. The two can look alike, but they work differently.

• Liquidation closes one position because its margin ran out. Your account stays open.
• A drawdown breach closes the account because your losses hit the firm's limit, whatever your margin says.

In a prop account the firm's limit is almost always the tighter of the two. A daily loss limit of a few percent of the starting balance will end the account long before a moderately leveraged position gets near its liquidation price. Plan around the firm's limit first. If the drawdown rules are new to you, trailing drawdown explained walks through how they move.

A take profit closes your position at a price you choose in advance to lock in a gain. A stop loss closes it at a price you choose to cap a loss. Set both when you enter, and they work whether you are watching or not.

A stop loss is not the same as liquidation. You set a stop, and you choose where it sits. Liquidation happens to you at a price you did not pick. A stop that sits well before your liquidation price means the venue should never have to close you out.

Exits matter more on a perp than on a CME contract for two reasons. The market can trade around the clock, so a position you leave open overnight or over a weekend keeps moving while you are away. And a perp never expires, so a losing trade with no exit can stay open and keep losing.

The distance from your entry to each exit sets your risk to reward. Risk 1 percent to aim for 2 percent and the ratio is 1:2, which means you can lose more trades than you win and still come out ahead. A stop loss is not a guaranteed price either. In a fast market the fill can slip past it, the same as on a CME contract.

A few habits cause most of the damage.

• Setting the stop so tight that normal noise takes you out.
• Trading without a stop because the position feels small.
• Moving the stop further away once the trade turns against you.

Perp prop firms run evaluations much like futures prop firms. You trade a simulated account, hit a profit target without breaking the loss rules, and get a funded account if you pass. The structure is familiar, but a few details catch futures traders out. Check each one against your own firm's rules, because they vary from firm to firm.

• Loss limits are often a percentage. Many perp evaluations write the daily and overall loss limits as a percentage of the starting balance rather than a dollar amount. Work out the dollar figure for your account size before you trade, and know whether it is measured from your balance or your equity.
• Leverage is capped by the firm. The firm's cap is often lower than the venue's, and it can differ between assets.
• The market does not close. A CME index futures account, trading NQ or ES, gets a daily break and a weekend. A perp account may not. Check whether the firm lets you hold over the weekend and when its trading day resets for the daily loss limit.
• Funding moves your balance. Funding on a held position is paid or received like any other profit or loss. Ask your firm whether it counts toward the daily loss limit.
• Size is not in contracts. A rule written as a maximum number of contracts on a futures account becomes a maximum position size or leverage on a perp account.

The habits that keep a futures evaluation alive carry over unchanged. Size so that one bad trade cannot end the account, and set the stop before you enter. Our guides to the consistency rule and to stopping revenge trading apply to perp accounts as much as futures ones.

Neither product is better. They suit different jobs.

Perps tend to suit traders who want to hold a view without managing contract months, who want to trade outside CME hours, or who want to size in small dollar steps instead of whole contracts. They are also where crypto markets trade the most.

CME futures tend to suit traders who want a central exchange with a clearing house behind every trade, deep liquidity during US hours, and a fixed contract the whole market quotes in the same way. They are also what most futures prop firms trade.

Many traders end up using both. If you do, keep their risk separate in your head. A 20 point stop on MNQ and a 1 percent stop on a perp are different amounts of money, and only the dollar figure matters to your account.

Tradecopia copies trades across CME futures accounts today. Copying for perp accounts is coming soon. In the meantime, the futures trade copier page covers what works now.