Partnered With:

Survival Handbook for Extreme Contract Rates: Only the Sly Succeed.

Read this article in 12 Minutes

Which strategy is more likely to be profitable in terms of probability for the contract?

Source: Nan Zhi, Odaily Star Daily

During the bear market, various trading platforms have repeatedly seen small-cap currencies force short squeezes and experience significant negative funding rates. There are often two strategies in the market:

- Or the funding rate for opening long positions and settling before charging fees.

- Or open a short position before settlement and immediately close it to take advantage of the drop in long positions when closing.

Odaily Planet Daily is based on market data to analyze situations on Binance where the fee rate is greater than -0.5%. Based on the results of multiple time period K-line analysis, we explore which strategy has a higher probability of profit when considering only the rise and fall of prices, without taking into account other data.

(Indicator Description: All high negative rates mentioned below refer to situations where the rate is greater than -0.5%; all extremely negative rates refer to situations where the rate is greater than -1.5%. This article is only a statistical analysis of historical data and is not intended as investment advice for future market trends.)

Overall Situation

Since 2023, there have been a total of 376 times when the funding rate on Binance has been higher than -0.5%, with an average of -1.209%. The frequency distribution of each rate interval is as follows. Among the 376 high-rate instances, there were 113 instances where the rate was greater than -1.5%, accounting for 30.2%. It can be seen that there is a significant probability of extreme values when the rate begins to shift towards high negative rates.

Odaily's statistical dimensions are as follows:

Time: including 1 minute, 3 minutes, 5 minutes, 4 hours, 8 hours, 24 hours.

The fluctuation of funding rate on the short line is significant after being charged. The lowest point may not occur within 1 minute after being charged, so 1 minute, 3 minutes, and 5 minutes are selected for comparison.

On the other hand, sometimes explosive market conditions will continue for a long period of time, and some long position users choose to hold for a long time. Therefore, we choose to observe the probability of long-term market continuation to make long positions profitable for 4 hours, 8 hours, and 24 hours.

Price:

The short line selects the lowest price and closing price, as it is difficult for manually operated users to close their positions at the lowest point.

Long-term selection of the highest price and closing price, as well as observing the continuation of long-term market trends, increases the probability of profit for long positions.

The closing price aims to eliminate the impact of momentary extreme fluctuations and is used for comparison with the lowest/highest price.

Short-term Situation Statistics

1 minute maximum decline average value is 1.90%, and 1 minute closing decline average value is 1.11%.

3 minute maximum decline average value 2.12%, 1 minute closing decline average value 1.05%;

5 minute maximum decline average value 2.26%, 5 minute closing decline average value 1.07%.

From the comprehensive data of all cases, there are several preliminary conclusions:

1. Compared to the average rate of 1.209%, if the long position closes within a short period of time after the fee is charged, the probability of profit is very small.

2. 1 minute, 3 minutes, and 5 minutes have continuously hit new lows in maximum decline, while the corresponding closing prices are close to each other, indicating that the trend during this period is in a W shape and the volatility is significant.

3. Based on the second point, the probability of short-term profit is high, and there are many opportunities to close positions.

Randomly selected ten tokens for the chart below, most of which have a clear W-shaped trend.

Long-term Situation Statistics

- 4-hour maximum increase average value 3.73%, 4-hour closing increase average value -1.29%;

- The maximum average increase in 8 hours is 5.84%, and the average closing increase in 8 hours is -1.36%.

- 24-hour maximum increase average value is 9.5%, and 24-hour closing increase average value is -3.34%.

The conclusion is as follows:

Impact of Rates on Price Trends

The following chart shows the short-term trend of all intervals.

As the negative fee rate increases, the short-term decline becomes more severe, but the closing price remains basically the same as the fee rate.

The following chart shows the trend of long lines in all intervals.

After grading, the long-term rules of each interval are consistent with the overall rules, namely: ① M-shaped trend ② long positions have opportunities to close profitably ③ the end of the market is fast.

Frequency Impact on Price Trends

- There were 28 instances where the maximum drop in 1 minute exceeded the funding rate, with a profit rate of 97%; there were 17 instances where the closing drop in 1 minute exceeded the funding rate, with a profit rate of 59%.

- 3-minute maximum decline profit ratio is 100%; 3-minute closing decline profit ratio is 41%.

Due to the extreme polarization of fees, the bearish profit probability of LPT is significantly higher than that of a single high fee situation.

Comparing with BLZ, which has experienced high negative rates for 61 times:

- There were 61 instances where the maximum drop in 1 minute exceeded the funding rate, with a profit rate of 100%; there were 46 instances where the closing drop in 1 minute exceeded the funding rate, with a profit rate of 75%.

- 5 minute maximum decline profit ratio 100%; 5 minute closing decline profit ratio 62%.

Similarly, among the 29 high negative fee rates,

- The maximum profit ratio of the 8-hour maximum increase is 100%; the profit ratio of the 8-hour closing increase is 31%.

- 24-hour maximum increase profit ratio is 100%; 24-hour closing increase profit ratio is 34%.

Similarly, the four tokens with the highest fee rates were selected for statistics, but due to the fact that they were selected based on the already occurred forced liquidation market, this statistic has significant "sampling bias" and is for reference only, with little guidance for similar situations in the future.

Conclusion

Based on the high fee rate situation of Binance in 2023, Odaily Star Daily has conducted data statistics on the following two strategies:

- Long strategy: Open long positions to receive funding rates before fees are charged for settlement;

- Bearish strategy: Open a short position before settlement and immediately close it after settlement to take advantage of the drop in long positions during the closing.

On the short-term operational level, bearish strategies have a clear advantage in terms of probability, with bearish profits accounting for the majority even when considering closing prices.

On a long-term operational level, the probability of a bullish strategy is slightly higher. After a high negative fee rate occurs, there is usually still an upward trend.