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Binance Hedging Arbitrage Trading Group
The four essential conditions for hedging arbitrage
1. Opposite directions—one long and one short
2. Both sides should have equal value, for example, both opened with 1000U
3. Open and close positions simultaneously
4. The selected assets in the hedging pair should generally move in the same direction; the core is that they rise and fall together, but with different magnitudes.
Profit principle of hedging arbitrage:
Normally, the arbitrage pairs rise and fall together but with different magnitudes, creating a price difference that allows for profit. For example, go long on ETH with 100U and short on SOL with 100U. Both positions are opened at the same time. After one hour, ETH rises by 5%, and SOL rises by 3%. Then both positions are closed simultaneously. One gains while the other loses, effectively earning a 2% profit.
Steps for cross-currency hedging arbitrage trading
1. Learn relevant professional knowledge, including the principles and conditions of hedging arbitrage.
2. Based on the condition that price movements should be broadly similar, find suitable assets to form an arbitrage group.
3. Based on the principle of going long on strong assets and short on weak ones, determine which asset to go long and which to go short.
4. After determining the direction, find a suitable spread and look for entry points in the opposite direction of the arbitrage.
5. Wait for the spread to revert to a normal level, then close both positions simultaneously and take profits to exit.
Cross-currency hedging for arbitrage risk
Four sources of risk
1. The biggest risk is choosing assets for the arbitrage group without following the principle of similar price movements; this could lead to opposite movements on both sides.
2. Position management: even with hedging, positions should not be too heavy, as excessive position size still carries the risk of liquidation.
3. When an anomaly occurs in the arbitrage group, do not monitor the market, do not stop-loss, just close the position.
4. Situations where the holding values on both sides of the arbitrage group are extremely unbalanced.
Seven advantages of hedging arbitrage
Advantage 1: Very low risk of liquidation, as equal-sized long and short positions are opened on both sides.
Advantage 2: In extreme rapid market movements or when the arbitrage direction is incorrect, you have sufficient time to act, as the positions move in opposite directions, resulting in one profit and one loss.
Advantage 3: Stable mindset and emotions, low risk, high stability; traders are unlikely to get overly excited because profits and losses are gradual and smooth, avoiding sudden large gains or losses within minutes.
Advantage 4: Reduced trading fees and fewer stop-losses, significantly fewer than in directional trading. Holding the arbitrage group for a longer time actually helps lower fees.
Advantage 5: Very easy to control drawdown; as long as the spread remains unchanged, both positions move in sync.
Advantage 6: To determine whether the direction is improving, you only need to assess the strength of the arbitrage group, which is easier to judge than a directional trade.
Advantage 7: There are opportunities to open positions regardless of whether the market is rising or falling, as long as the spread is favorable.
