What is High Frequency Trading?
High frequency trading has become a buzz word in the recent years in the trading world. However, it is not much more than placing large number of trades in a short period of time. Of course, with a focus on high win rate. High frequency trading aims for a lot of successful trades for extremely small margins which adds up over time. Because, traders gain between 0.2% to 0.5% profit per trade, things like exchange fees and cost of trading is highly important. However, it is important to understand the fact most HFT models win 99% of the time small and lose that 1% of the time so big that you end up in under water. Therefore, I can’t emphasize enough to perform proper position sizing and risk management.
Most people have this expectation that high frequency trading models has to be extremely complicated and complex. Yet, this is far from the truth. Yes, it does require moderate knowledge on trading, coding and mathematics. If you are reading this, you probably possess some if not all of the required skills above. Let’s explore some of the most common as well as more complex models of high frequency trading.
Market Making
If you plan to use this trading method check out our automated trading system for advance market making.
If you intend to run this strategy, we advise to use it on Bitmex or ByBit. Because, they do offer rebate on limit orders unlike Binance.
We will dedicate an entire article for this trading style in the future and dive more in depth to it.
Mean Reversion
If you plan to use this trading method check out our automated trading system for mean reversion.
If you intend to run this strategy, we advise to use it on Binance since it is more volatile and, in this strategy, we don’t aim for rebate fee.
We will dedicate an entire article for this trading style in the future and dive more in depth to it.
Arbitrage
Arbitrage has become a phrase that’s used by pretty much everyone who trades. However, it does have a lot of different version and models that people don’t know about. The simple idea is that traders to capitalize on the market inefficiencies such as price discrepancy across exchanges. For example, you can buy Bitcoin at $10,000 on exchange A and sell for $10,100 on exchange B. However, it is not that simple and easy as there are a lot of variables that would need to go in your way. There are inherit dangers like transfer time of the funds between exchanges, transfer cost and potential of price dropping below your initial entry price resulting in a loss. Read more for potential dangers.
We will dedicate an entire article for this trading style in the future and dive more in depth to it.
Triangular Arbitrage
Triangular arbitrage is one of the more complicated examples of arbitrage and high frequency trading models yet, still simple to grasp the idea. If you thought “It is too much hustle to execute trades across exchanges and rebalance them”, you will like T-Arb very much. Here, the trader aims to capitalize on the price discrepancies within the same exchange. Let’s look at Binance for this example.
Let’s assume that you have Bitcoin, Link and USDT in your account.
You are looking at the following markets with following prices
BTC = $10,000
LINK/BTC = 0.005
LINK/USDT = 5.1$
So, if you were to buy Link in LINK/BTC market and turned around to sell it in LINK/USDT market, you would have paid 5$ worth of Bitcoin for Link and sell it for 5.1$ USDT. At this point, you can go and buy Bitcoin with USDT for 5.1$ worth, ultimately making 2% profit in this trade. Read for more details.
This is strategy is best used on Binance due to the fact that it has the most markets with different base pairs.
This an entry level article for high frequency trading and models. However, there are numerous quant firms that uses the trading models mentioned above with of course, few of their tweaks and safety mechanisms. We will explore more complicated and complex models in the upcoming posts.
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