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

In the previous discussion about 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 you 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 in terms that kindergarteners can understand. You don't need to worry about any unfamiliar terms.

Assuming the current market price is 10 yuan for one apple, and I have 1000 yuan:

💵 $1,000 🍎 $10/pcs

First, I take out 500 yuan and buy 10 apples, leaving 500 yuan.

💵 $500 🍎for 50 pcs

Let's start with a simple grid:
For every 1 yuan increase in the price of apples, we will place a sell order for one apple.
When Apple reduces the price by 1 yuan, we will place a buy order and evaluate it.
If the price goes as expected, we will increase it to 11 yuan and sell one apple.
The price has fallen back to 10 yuan, and we will buy back the apple again.

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

💵 $501 🍎for 50 pcs

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

Of course, if it is possible to make a profit solely relying on the grid strategy, there would be no need to develop quantitative programs, and everyone would be able to make money.

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

For example, returning 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 moment, we have 55 apples, but the value of these 55 apples is: 55 * 5 yuan/apple = 275 yuan. Adding our cash of 465 yuan, the value of our assets is only 740 yuan remaining!

💵 $465 🍎55

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

And if the price continues to decline, the grid strategy will basically not be able to achieve profitability.