Implementing Market-Neutral Strategies on Flipster
What are Market-Neutral Strategies?
Market-neutral strategies empower traders to profit from both upswings and downswings in the market. Instead of betting on the directional performance of a single digital asset, the focus is on capitalizing on price differentials between assets.
While most cryptocurrencies tend to move together (high correlation coefficient), the volatile nature of the crypto market often creates opportunities for implementing market-neutral strategies such as hedging, where traders take offsetting positions in different assets to mitigate market risk.
Benefits of Market-Neutral Strategies
One of the primary benefits of implementing market-neutral strategies is the ability to mitigate market risk and maximize the use of your trading capital.
In both uptrends and downtrends, digital assets can move in different directions, creating price differentials between spot and futures markets or even between different cryptocurrencies. The goal is to identify these uncorrelated assets or price discrepancies and capitalize on them.
Given the inherent volatility of the crypto market, market-neutral strategies enable traders to exploit both bullish and bearish momentum. By offsetting potential losses in one position with gains in another, you can achieve a low correlation with the overall market and potentially generate consistent returns.
Drawbacks of Market-Neutral Strategies
Complexity: These strategies are generally more complex than simply buying and selling cryptocurrencies. Identifying the least correlated assets and executing trades with precise timing can be challenging, especially in fast-moving markets.
Timing and Execution: Accurate timing can determine profit or loss on a trade, particularly for time-sensitive strategies like statistical arbitrage, where executing two-legged spreads can be tricky due to rapid price fluctuations.
Slippage: The difference between the expected price of a trade and the actual execution price, can impact the profitability of market-neutral strategies.
Types of Market-Neutral Strategies
Statistical Arbitrage
Statistic arbitrage uses quantitative methods to identify temporary pricing inefficiencies between related assets. Traders typically use statistical models to find assets that historically exhibit a high correlation. When this correlation deviates from the norm, it presents a trading opportunity.
How it's used: Identify two assets with a strong historical correlation. When their prices diverge, open a long position in the undervalued asset and a short position in the overvalued asset. Profit as the prices revert to their historical relationship.
Identify correlated assets: Use a correlation coefficient indicator to find crypto pairs trading opportunities.
Monitor price deviations: Use real-time charts and alerts to track price movements and identify deviations from the historical correlation.
Execute trades: When a significant deviation occurs, open long or short positions accordingly.
Basis Trading
Basis trading exploits price differentials between a cryptocurrency's spot price and its futures price. The difference, known as the basis, tends to converge as the futures contract approaches its expiration date.
How it's used: Buy the cryptocurrency on the spot market and simultaneously sell a futures contract on that same cryptocurrency. Profit from the convergence of the spot and futures prices as the futures contract nears expiration.
Analyze spot and futures prices: Compare the current spot price and futures price of your chosen cryptocurrency, and look for significant discrepancies between the spot and futures prices.
Execute trades: Buy the cryptocurrency on the spot market and simultaneously sell a futures contract.
Monitor the basis: Track the basis as the futures contract approaches expiration, and close your positions as the basis converges, realizing your profit.
Fundamental Arbitrage
Fundamental arbitrage focuses on exploiting discrepancies in the fundamental valuation of related assets. Traders identify assets that are mispriced relative to their intrinsic value based on fundamental analysis.
How it's used: Identify two assets with similar fundamentals but different market valuations. Open a long position in the undervalued asset and a short position in the overvalued asset. Profit as the market recognizes the mispricing and the valuations converge.
Conduct fundamental analysis: Use Flipster's charts, news sources, and research tools to evaluate the fundamentals of the underlying assets of different perpetual futures contracts.
Identify mispriced perpetual futures: Compare the fundamental valuations of the underlying assets of related perpetual futures contracts to identify potential discrepancies.
Execute trades: Open long and short positions in the perpetual futures contracts accordingly, using Flipster's advanced order types.
Monitor market developments: Stay informed about news and events that may impact the valuation of your chosen assets and their corresponding perpetual futures contracts.
Manage risk: Use stop-loss orders, take-profit orders, and other risk management tools to protect your capital.
Cash and Carry
Cash and carry involves buying an asset in the spot market and simultaneously selling a futures contract on that asset. It aims to profit from the difference between the spot and futures prices, plus any potential interest earned from holding the asset.
How it's used: Buy the cryptocurrency on the spot market and simultaneously sell a futures contract on that same cryptocurrency. Hold the position until the futures contract expires, profiting from the price convergence and potential interest earned.
Analyze spot and perpetual futures prices: Use Flipster's trading platform to compare the current spot price and perpetual futures price of your chosen cryptocurrency.
Identify opportunities: Look for situations where the perpetual futures price is significantly higher than the spot price, providing a favorable price differential. Also, consider the current funding rate and its potential impact on your profitability.
Execute trades: Buy the cryptocurrency on the spot market and simultaneously sell a perpetual futures contract on Flipster.
Monitor prices and funding rates: Continuously track the price differential between the spot and perpetual futures markets. Pay close attention to funding rates, as they can significantly impact your profitability.
Manage risk: Use stop-loss orders and other risk management tools to protect your capital. Consider adjusting your position size based on funding rate fluctuations.
Close positions: Close your positions when the price differential narrows, funding rates become unfavorable, or when your profit target is reached.
How to Trade Cryptocurrencies on Flipster
Sign up for an account on the Flipster website or by downloading the Flipster app (Android or Apple).
Click the [Trade] tab.
Search for your preferred cryptocurrency and click on it.
Select the leverage (up to 100x).
Select either a Trigger Order or Market Order.
Enter the amount of coin you want to trade or choose a percentage of your available funds.
Once you have confirmed the details, click the [Long] or [Short] button to open a position.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.