Last month we covered the funding rate model and how it can be deployed as a potential trading strategy. That led to few enquiries on longer holding period and returns. Let's cover that in this thread.
To recap, when funding rates go negative, analysts discuss about a possibility of reversal. So we dug a little deeper.
twitter.com/Jarvis_Labs_LLC/status/1541768903474532353
The conclusion earlier was that, keeping the holding period tighter (8 hours) yielded the best combination of returns and max drawdown.
twitter.com/Jarvis_Labs_LLC/status/1541768938320805894?s=20&;t=W-FikhicvlQ6dkHp2H2ryQ
To quantify this a step further we used this information to create a ratio which measures each strategy's cumulative profits since Jan. 2020 vs their maximum drawdown during that same period
The higher the ratio, the greater potential reward vs historical risk potential
Here we saw the best performing strategy was again the 8h trade
Not only were 8h cumulative returns highest @ 212.74%, they also had the lowest max drawdown of only 14.77%
This resulted in an 8h return/drawdown ratio of 14.40, ~35% higher than the 2nd place 16h strategy
We also observed that in each time frame beyond 8hr cumulative profits diminished while max drawdowns increased
So longer the trades were held, the risk probability increased as reward probability decreased
A bad combination which resulted in lower ratio scores
We hope this thread brings more clarity to the debate of trading negative funding
It is our data based belief that negative funding presents profitable opportunities, but opportunities on specifically short timelines which need be carefully managed by traders