Main:

  • Market neutral strategies allow traders to profit no matter which direction the cryptocurrency market is moving.

  • This helps protect the portfolio from sudden movements and high market volatility.

  • Market neutral strategies are usually a little more complex than simply buying and selling assets, so traders should consider the advantages and disadvantages before implementing them.

A market-neutral trading strategy is one that aims to make a profit regardless of the direction in which the cryptocurrency market is moving. It involves an unbiased approach that involves taking both long and short positions simultaneously.

Market neutral strategies have proven to be a useful tool for reducing overall trading risk while maintaining profitability, as they allow you to profit from the relative price movement between two digital assets.

In this article, we'll look at how market-neutral strategies work and what to consider when using them.

What are market-neutral strategies?

Market-neutral strategies allow traders to profit from both upward and downward market movements. This position helps you make money on any impulses in the cryptocurrency market.

The essence of these strategies is to make concentrated bets based on price differences, rather than on the direction of movement of a single digital asset.

Although most cryptocurrencies have a high correlation coefficient, the volatile nature of the market usually makes market-neutral strategies profitable for traders. This approach is also common in traditional markets, where it is known as hedging, that is, taking offsetting or opposing positions in different assets.

Benefits of Market Neutral Strategies

One of the main benefits of market-neutral strategies for traders is the reduction of risk, and therefore the most efficient use of trading capital.

During uptrends and downtrends, digital assets move in different directions, causing price differences in the spot and futures markets. To apply a market-neutral strategy, you need to figure out which digital assets are not correlated with each other, or determine the difference in prices in different markets.

Due to the high volatility of cryptocurrencies, market neutral strategies allow traders to take advantage of any bullish or bearish trend. This course of action helps to achieve a low positive correlation with the market, since losses from one position can be offset by profits from another.

Disadvantages of market-neutral strategies

While market-neutral strategies have a number of advantages, such as reducing risk during periods of extreme volatility, there are also disadvantages.

Market neutral strategies are a little more complex than simply buying and selling cryptocurrencies. To open suitable positions, traders need to select assets with the lowest correlation. Moreover, timing is important in statistical arbitrage because fast price movements can make it difficult to implement two-legged spreads.

You also need to know exactly the size of each position and understand at what points to place stop loss orders. This depends on the available trading capital and the trader's risk tolerance. Before you start trading, you need to decide how much you are willing to trade and how much you are willing to risk (in dollars).

Another factor to consider when implementing market neutral strategies is slippage, which is the difference between the expected price of a trade and the price at which the trade is actually executed.

Basic trading

Basis trading involves taking offsetting or opposing positions in the same cryptocurrency in the spot and derivatives markets to profit from price differences. The difference in prices in different markets is called the basis.

Although no one knows in advance what the price of an asset will be at a particular point in time, the basis can be determined before it is reduced to zero at the expiration of the derivative. Therefore, basis trading can be profitable - provided you are careful and have a sound risk management strategy.

Let's assume that on March 31, 2022, a trader purchased BTCUSDT on Binance for $45,510.34 and then sold the corresponding number of BTCUSD 0624 quarterly futures contracts for $46,021.60 on Binance Futures. The trader correctly predicted the price difference at the expiration of the derivative and made a profit of $511.26 per contract.

The main thing with basic trading is to identify the difference in prices of the same cryptocurrency in the spot market and the derivatives market. The trader's goal is to make a profit without exposing the investment to risks caused by changes in the prices of the underlying asset.

Statistical arbitrage

Statistical arbitrage involves making money from price inefficiencies in cryptocurrency markets.

Pairs trading is a common form of statistical arbitrage using cryptocurrency pairs that typically move in opposition to each other. An arbitrage trading opportunity occurs when these two assets behave abnormally. As soon as their behavior returns to normal, open positions are closed.

Two statistical methods are used to determine the relationships between assets: correlation and cointegration. Correlation describes the degree to which asset movements are related. In turn, cointegration helps identify cryptocurrencies that may move independently of each other in the short term, but are more likely to reach equilibrium in the long term.

For example, between February 22 and March 10, 2022, the price of WAVES increased by more than 200%, while FTM fell by more than 36% during the same period. A trader implementing a market-neutral strategy could go long WAVES to profit from a rise in price and short FTM to profit from a sharp decline in the asset.

Summary

Opening long and short positions at the same time allows you to make a profit regardless of what is happening in the market as a whole. Therefore, market-neutral strategies can be beneficial under conditions of uncertainty.

Market neutral trading strategies carry minimal risk, but this is only true if executed carefully and with a sound risk management strategy in place. This type of trading involves active management, since traders need to monitor what is happening in the market and the behavior of several assets at once.

Binance Futures has a trading simulator where you can test market-neutral strategies without risking your capital. What are you waiting for? Register today and put your new knowledge into practice!

For more information about Binance Futures, check out the following articles:

  • (Blog) 10 Reasons to Trade Futures on Binance

  • (Blog) Cryptocurrency futures: what you need to know when starting to trade

  • (Blog) Crypto Futures Risks and Money Management: 5 Ways to Better Manage Risks When Trading

  • (Support) Binance Futures Products and Features Overview

  • ...and other frequently asked questions about Binance Futures.

Denial of responsibility. Cryptocurrency assets are volatile products with a high risk of rapid loss of capital. Prices may fluctuate significantly at any time. As a result of price fluctuations, the value of your assets may increase or decrease significantly at any time, which could result in you losing all of the capital you used in the transaction.

Don't use funds you can't afford to lose. Before deciding to trade on our service, it is very important to fully understand the risks by assessing your financial resources, level of experience and risk appetite. If necessary, you should seek advice from an independent financial expert. Your actual gains and losses will vary depending on many factors, including market behavior, market movements and the size of your trade. Past performance is no guarantee of future performance. The value of the funds invested may increase or decrease. Find out more about it here.