The King of Neutral Strategies - Analysis of Market-making Strategy Logic (Part 1)

In the previous discussion on quantitative strategies, we mentioned a lot of concepts. It is still difficult for everyone to have a precise understanding of quantification. Practice is the only criterion for testing the truth. I will guide you step by step to analyze a strategy, so that everyone can have a clear understanding of the development of scientific and rigorous quantitative strategies.

Next, I will explain the core principles of market-making strategies at a level that kindergarteners can understand, so you don't need to worry about any unfamiliar terms.

Assuming that the current market price is 10 yuan for an apple, I now have 1000 yuan:

💵 $1,000 🍎 $10/pcs

First, I take out 500 yuan and buy 10 apples, with 500 yuan remaining:

💵 $500 🍎for 50 pcs

Let's start by creating a simple grid.
For every 1 yuan increase in the price of apples, we place a sell order for one apple.
For every drop in the price of Apple, we place a buy order and an evaluation order.
If the price goes as expected, we will raise the price to 11 yuan and sell an apple.
The price has fallen back to 10 yuan, and we are buying back Apple again.

At this point, we have 501 yuan and 50 apples, with a total asset value of 1001 yuan, so we have achieved a profit of 1 yuan.

💵 $501 🍎for 50 pcs

The idea of the grid strategy is very simple. Now the grid strategy is also very popular in major exchanges. You can try to understand it first.

Of course, if making profits solely relying on grid strategy, there is no need to develop quantitative programs, and everyone can make money.

The biggest problem with grid trading is very simple, it is a sharp decline followed by breaking through the grid range.

For example, going back to the previous example:
Apple fell from 10 yuan to 5 yuan, and we bought apples at prices of 9, 8, 7, 6, and 5 yuan respectively, totaling 5 apples.

At this point, we have 55 apples, but the value of these 55 apples is: 55 * 5 yuan/apple = 275 yuan. Adding our cash of 465 yuan, our total asset value is only 740 yuan!

💵 $465 🍎55

We have lost of our initial total assets of 1000 yuan: (740-1000)÷1000*100%=-26%!

And if the price continues to decline, the grid strategy will basically be unable to achieve profitability.