Diversified Futures Trading for Optimal Risk and Reward
First of all, this idea/strategy, came to me while I was/am trading futures on Binance and practicing it made me realize that I have realized more profit than usual. It also helped me manage the risk/reward ratio.
In order to explain the strategy, remember that the whole idea of this strategy is to minimize the risk and maximize reward while trading futures and to explain how diversification helps the overall PNL.
I'm going to start with giving an example, and how I apply it in my trades, in order for it to be clearer.
Let's dive in.
Assume you have 5000 USDT that you are willing to invest in futures. Instead of investing it all on one asset (coin), diversify like following:
1000 USDT on A/usdt.p (with A being an asset) with 20x leverage
1000 USDT on B/usdt.p with 20x leverage
1000 USDT on C/usdt.p with 20x leverage
1000 USDT on D/usdt.p with 20x leverage
1000 USDT not invested on anything, just so you have margin ratio.
Depending on whether you trade cross/isolated, this strategy changes a bit but let's assume you trade on cross. So you have invested in 4 different assets, each of them by 1000usdt x 20 leverage.
Before you decide on which assets you are going to invest, do your own research and have an existing strategy or analysis, which you have confidence into.
Personally, I recommend investing in 4 different assets which have: 1. Different chart patterns, 2. Different categories and 3. Different wave counts. This is important for the following strategy. Remember to have demand/supply, MAs and Oscillators included in your analysis. Set your TP's and your Stop losses as you would do normally. Of course, your TP's POSITIVE PNL (ROI%) should be higher than your Stop losses NEGATIVE PNL (ROI%).
After you have analyzed, made your research and have decided on the assets, LONG/SHORT them and carefully track the progress.
The whole purpose of the strategy is that the assets won't pump/dump on the same time and to use this to your advantage.
Let's assume that you have POSITIVE PNL (ROI%) on only A/usdt.p and C/usdt.p while B/usdt.p and D/usdt.p are giving NEGATIVE PNL (ROI%). For example A and C are 50% up and B and D are 50% down. In that case, you PARTIALLY (25%-50%) = X, close the assets with POSITIVE PNL and you ADD more on your C and D positions. Wait to see how the market reacts and:
1. If the market continues to go in the same trend, your A and C will hit your TP's (yes on a lower profit than initially indented) and your B and D assets will hit your your SL's (yes on a higher loss than initially indented) but since TP ROI > SL ROI that means that you have achieved more profit than losses while minimizing risk. OR
2. If the markets starts to shift in the different trend, your A and C will start shifting towards your Entry position or maybe even hit your SL's (but now on a lower quantity) while B and D will start rising going above Entry position or maybe even hit your TP's (but now on a higher quantity), which means your losses on A and C will be X lower while your winnings on B and D will be X higher.
You continue to manipulate A, B, C and D like this, until you either:
1. Hit ALL TP's with much higher profit indented (since you added quantity when your assets were lower) or
2. Hit ALL SL's with much lower losses indented (since you closed X amount of position when you were higher and added when it was lower than the entry price).
Remember that you still have have 1000 USDT to keep the margin ratio healthy and in extreme cases (when more than 2 assets are on negative ROI%) to add quantity to the assets with negative ROI% (under the entry price) and higher than SL.
This will also make it so you have LOWER overall entry price on the NEGATIVE ROI%.
This idea/strategy has some requirements and assumptions:
1. That you understand well the asset analysis, such as support/resistances, indicators, chart patterns and others.
2. You understand how the binance futures basically work.
3. You are COMMITED and have plenty of time to OBSERVE the assets and INTERVENE if necessary.
4. You understand risk/reward management.
5. You have read and understood binances terms and agreements.
This strategy doesn't require (but prefers) that all the assets have POSITIVE ROI% and a NEGATIVE ROI% on all assets is not a dissolution (but not preferred).
If I were to put all this in a formula, it would be as follows:
### Variables:
- \(P\): Total capital available for trading (e.g., 5000 USDT)
- \(N\): Number of assets to invest in (e.g., 4)
- \(L\): Leverage (e.g., 20x)
- \(A_i\): Amount invested in asset \(i\) (e.g., 1000 USDT)
- \(TP_i\): Take Profit level for asset \(i\)
- \(SL_i\): Stop Loss level for asset \(i\)
- \(PNL_i\): Profit and Loss for asset \(i\)
- \(X_i\): Percentage of position to close on positive PNL (e.g., 25% or 50%)
- \(R\): Reserved capital for margin ratio maintenance (e.g., 1000 USDT)
- \(T\): Total invested capital \(T = P - R\)
### Initial Investment Formula:
1. **Allocate capital to each asset:**
\
2. **Leverage Calculation:**
\
### Active Management Formulas:
3. **Partial Closing of Positions:**
When \(PNL_i > 0\):
\
4. **Reallocate to Negative PNL Positions:**
\
5. **Adjust Position Quantities:**
- For positive PNL positions (A and C in the example):
\
- For negative PNL positions (B and D in the example):
\
### Scenario Outcome:
6. **Evaluate Positions:**
- If the market trend continues:
- Calculate overall profit based on adjusted positions hitting TP and SL levels.
\
\]
- If the market reverses:
- Calculate overall profit based on reversed trend.
\
\]
### Margin Management:
7. **Ensure Reserved Capital:**
Always keep \(R\) amount as reserved capital to maintain a healthy margin ratio.
\
### Summary Formula:
\ + \text{Remaining Capital}
\]
### Practical Example:
1. Initial investment in each asset \(A_i\):
\
2. Effective investment with leverage:
\
3. Partial close for positive PNL assets (A and C):
\
4. New allocation for negative PNL assets (B and D):
\
5. Adjusted positions:
\
\
6. Evaluate Total PNL based on market scenarios.
Last but not least, this is NOT a financial advice and ALWAYS do your own research before making financial decisions.
In order to explain the strategy, remember that the whole idea of this strategy is to minimize the risk and maximize reward while trading futures and to explain how diversification helps the overall PNL.
I'm going to start with giving an example, and how I apply it in my trades, in order for it to be clearer.
Let's dive in.
Assume you have 5000 USDT that you are willing to invest in futures. Instead of investing it all on one asset (coin), diversify like following:
1000 USDT on A/usdt.p (with A being an asset) with 20x leverage
1000 USDT on B/usdt.p with 20x leverage
1000 USDT on C/usdt.p with 20x leverage
1000 USDT on D/usdt.p with 20x leverage
1000 USDT not invested on anything, just so you have margin ratio.
Depending on whether you trade cross/isolated, this strategy changes a bit but let's assume you trade on cross. So you have invested in 4 different assets, each of them by 1000usdt x 20 leverage.
Before you decide on which assets you are going to invest, do your own research and have an existing strategy or analysis, which you have confidence into.
Personally, I recommend investing in 4 different assets which have: 1. Different chart patterns, 2. Different categories and 3. Different wave counts. This is important for the following strategy. Remember to have demand/supply, MAs and Oscillators included in your analysis. Set your TP's and your Stop losses as you would do normally. Of course, your TP's POSITIVE PNL (ROI%) should be higher than your Stop losses NEGATIVE PNL (ROI%).
After you have analyzed, made your research and have decided on the assets, LONG/SHORT them and carefully track the progress.
The whole purpose of the strategy is that the assets won't pump/dump on the same time and to use this to your advantage.
Let's assume that you have POSITIVE PNL (ROI%) on only A/usdt.p and C/usdt.p while B/usdt.p and D/usdt.p are giving NEGATIVE PNL (ROI%). For example A and C are 50% up and B and D are 50% down. In that case, you PARTIALLY (25%-50%) = X, close the assets with POSITIVE PNL and you ADD more on your C and D positions. Wait to see how the market reacts and:
1. If the market continues to go in the same trend, your A and C will hit your TP's (yes on a lower profit than initially indented) and your B and D assets will hit your your SL's (yes on a higher loss than initially indented) but since TP ROI > SL ROI that means that you have achieved more profit than losses while minimizing risk. OR
2. If the markets starts to shift in the different trend, your A and C will start shifting towards your Entry position or maybe even hit your SL's (but now on a lower quantity) while B and D will start rising going above Entry position or maybe even hit your TP's (but now on a higher quantity), which means your losses on A and C will be X lower while your winnings on B and D will be X higher.
You continue to manipulate A, B, C and D like this, until you either:
1. Hit ALL TP's with much higher profit indented (since you added quantity when your assets were lower) or
2. Hit ALL SL's with much lower losses indented (since you closed X amount of position when you were higher and added when it was lower than the entry price).
Remember that you still have have 1000 USDT to keep the margin ratio healthy and in extreme cases (when more than 2 assets are on negative ROI%) to add quantity to the assets with negative ROI% (under the entry price) and higher than SL.
This will also make it so you have LOWER overall entry price on the NEGATIVE ROI%.
This idea/strategy has some requirements and assumptions:
1. That you understand well the asset analysis, such as support/resistances, indicators, chart patterns and others.
2. You understand how the binance futures basically work.
3. You are COMMITED and have plenty of time to OBSERVE the assets and INTERVENE if necessary.
4. You understand risk/reward management.
5. You have read and understood binances terms and agreements.
This strategy doesn't require (but prefers) that all the assets have POSITIVE ROI% and a NEGATIVE ROI% on all assets is not a dissolution (but not preferred).
If I were to put all this in a formula, it would be as follows:
### Variables:
- \(P\): Total capital available for trading (e.g., 5000 USDT)
- \(N\): Number of assets to invest in (e.g., 4)
- \(L\): Leverage (e.g., 20x)
- \(A_i\): Amount invested in asset \(i\) (e.g., 1000 USDT)
- \(TP_i\): Take Profit level for asset \(i\)
- \(SL_i\): Stop Loss level for asset \(i\)
- \(PNL_i\): Profit and Loss for asset \(i\)
- \(X_i\): Percentage of position to close on positive PNL (e.g., 25% or 50%)
- \(R\): Reserved capital for margin ratio maintenance (e.g., 1000 USDT)
- \(T\): Total invested capital \(T = P - R\)
### Initial Investment Formula:
1. **Allocate capital to each asset:**
\
2. **Leverage Calculation:**
\
### Active Management Formulas:
3. **Partial Closing of Positions:**
When \(PNL_i > 0\):
\
4. **Reallocate to Negative PNL Positions:**
\
5. **Adjust Position Quantities:**
- For positive PNL positions (A and C in the example):
\
- For negative PNL positions (B and D in the example):
\
### Scenario Outcome:
6. **Evaluate Positions:**
- If the market trend continues:
- Calculate overall profit based on adjusted positions hitting TP and SL levels.
\
\]
- If the market reverses:
- Calculate overall profit based on reversed trend.
\
\]
### Margin Management:
7. **Ensure Reserved Capital:**
Always keep \(R\) amount as reserved capital to maintain a healthy margin ratio.
\
### Summary Formula:
\ + \text{Remaining Capital}
\]
### Practical Example:
1. Initial investment in each asset \(A_i\):
\
2. Effective investment with leverage:
\
3. Partial close for positive PNL assets (A and C):
\
4. New allocation for negative PNL assets (B and D):
\
5. Adjusted positions:
\
\
6. Evaluate Total PNL based on market scenarios.
Last but not least, this is NOT a financial advice and ALWAYS do your own research before making financial decisions.
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