The straddle strategy is primarily used for risk management, where you set the amount of your portfolio that will be invested in a given market (i.e. currency pair), with the amount varying based on where the market price is within a given price range (
Lower Target Price and
Upper Target Price).
If the market price of ZEC-BTC increases towards the upper range, then the percentage that will be invested will decrease. Assuming no scaling is applied, when the price is at the middle of the range, then you will invest only 50% of your maximum allocation of your portfolio. If the price increases to the point that it’s equal to your upper target price, then you’ll invest 0%, which means you’ll sell all of your ZEC (your base ) into BTC (your counter).
This strategy also has a secondary purpose, which is to profit from short-term price fluctuations. Let’s say you set a
Pivot Margin of 10%, If the price decreases to a level that results in a 10% difference between the
Base Allocation % and the
Current Target %, then you’ll be in
Allocation Mode, which means you will buy enough ZEC so that you go into
Neutral Mode, where there is no longer a difference between the two percentages. Conversely, when the price increases so that your
Base Allocation % is 10% higher than your
Current Target %, you’ll sell an amount ZEC so that you are back to neutral (or zero difference).
Assuming a ZEC-BTC pair, this is the amount of ZEC that the strategy will use for its calculations. The starting value is your base wallet balance, and you can override the value. Also, if there are deposits and withdrawals in your base wallet, they won’t affect the base allocation. The base allocation will remain the same unless a buy or a sell is triggered by the straddle strategy.
This prevents the situation where a manual withdrawal from your base wallet will immediately make your strategy go into allocation mode and start buying.
Assuming a ZEC-BTC pair, then this is the amount of base (ZEC) measured in counter (BTC) that you will have allocated when the Current Target % is 100%. You can set this to budget how much BTC you are willing to invest. The lower the market price, the more you will invest, up to your Maximum Allocation.
Lower Target Price and Upper Target Price
This is used to calculate the
Current Target %. The midpoint of your lower and upper price will result in a
Current Target % of
50% when no scaling is applied.
If the market price falls outside your range, then the strategy will be suspended (i.e. no buys or sells will occur) until the price moves back into your range.
Lower Margin and Upper Margin
The margin is used to adjust your
Lower Target Price and
Upper Target Price so the range is narrower, where 0% is at the lowest price, and 100% is at the highest price.
If the market price falls outside the price range adjusted by your margin, then the strategy will be suspended until the price moves back into your margin-adjusted range.
Pivot Mode and Pivot Margin
Setting the pivot mode to “PRICE” and a pivot margin to 10% will look for a 10% movement in the actual price to initiate a buy or sell.
Setting the pivot mode to “RANGE” and a pivot margin to 10% will look for a 10% movement of your straddle range (Upper-Lower) to initiate a buy or sell.
Scaling is set to NONE by default. You may want to increase your scaling if you prefer to allocate more at the lower price points. For example, if the
Current Target % of
50% is too high, then increasing your scaling will reduce your
Current Target % to say
With no scaling, you’ll be increasing your allocation by the same amount for each dollar decrease in price. With scaling, you’ll be increasing your allocation by a higher amount for each dollar decrease in price.
This feature is more profitable when you prefer to wait for the price to drop much before doing most of your allocation. For example, let’s assume you set your lower target price to $11,000 and upper target price to $25,000.
When no scale is used, you allocate 75% of your opportunity when the price is $14,500. When you're aggressively scaled, you allocate 75% of your opportunity when the price is $12,000. As you can see, the price needs to be much lower than if you were not scaled. If you know the price is going to drop to $12,000, then using an aggressive scale will be more profitable because you saved yourself from allocating at a higher price under no scaling.
Here are the definitions for each field that is calculated by the strategy (when no scaling is applied):
Base Allocation % is your
base allocation (converted into your counter value) as a percentage of your
Maximum Allocation. If your
Maximum Allocation is 1.00 BTC and your
Base Allocation is 20 ZEC which is equivalent to 0.86 BTC, then your
Base Allocation % is equal to
0.86 / 1.00 * 100 = 86.
basePercent = baseAllocationValue / maxAllocation * 100
Current Target is the position of the market price relative to a given price range (
lowerPrice). If no scaling is applied, then 50% means the price is at the midpoint of your range. The more aggressive your scale, then lower the percentage. The
Current Target is used as the percentage that you want your
Base Allocation % to become.
targetPercent = (upperPrice - currentPrice) / (upperPrice - lowerPrice)
When do you buy or sell? You buy when your
Base Allocation % is less than your
Current Target Percent % by more than your
Pivot Margin %, assuming your
Pivot Mode is set to
RANGE. A similar logic applies when you sell.
isTimeToBuy = basePercent + rangePivotMargin < targetPercent isTimeToSell = basePercent - rangePivotMargin > targetPercent
How does the Straddle Strategy work in practice? How does it limit your risk, and how is it profitable even when the market is moving side-ways?
Let’s say you added a straddle with the below settings. We set the
Pivot Mode to
PRICE to ensure that we only trade when the price has moved by 10% or more.
Max Allocation = 1.00000000 BTC Counter Wallet Balance = 1.00000000 BTC Pivot Mode = PRICE Pivot Margin = 10.00% Scale Mode = NONE Lower Target Price = 0.02500000 Upper Target Price = 0.15000000 Lower Margin = 100% Upper Margin = 0%
We begin at a neutral state, because we’ve allocated the same percentage as the current target. Since we’ve set the
Pivot Mode to
PRICE, the algorithm will convert the
Pivot Margin to the equivalent
11.99% so that we only buy or sell when the price exceeds 10% of the target price (i.e. the price in neutral mode).
Current Price = 0.04300000 BTC Current Mode = NEUTRAL Current Target = 85.60% Range Pivot Margin = 11.99% Next Allocation Level = 0.03856738 BTC Next Distribution Level = 0.04714235 BTC Base Allocation = 20 ZEC (86.00% @ 0.86000000 BTC) Wallet Balance = 1.86000000 BTC
Price decreases to next allocation price
The market price of ZEC decreases to
0.03856738 BTC, putting us in ALLOCATION. The algorithm buys ZEC so we now have a
Base Allocation of
23.1142769 ZEC (previously
20 ZEC), which puts us back into NEUTRAL.
Current Price = 0.03856738 BTC Current Mode = NEUTRAL Current Target = 89.15% Range Pivot Margin = 12.00% Next Allocation Level = 0.03471098 BTC Next Distribution Level = 0.04242764 BTC Base Allocation = 23.1142769 ZEC (89.15% @ 0.89145710 BTC) Wallet Balance = 1.77104733 BTC
Price increases to next distribution level
The market price of ZEC increases to
0.04242764 BTC, putting us in DISTRIBUTION. The algorithm sells ZEC so we now have a
Base Allocation of
20.2866518 ZEC (previously
23.1142769 ZEC), which puts us back into NEUTRAL.
Current Price = 0.04242764 BTC Current Mode = NEUTRAL Current Target = 86.06% Range Pivot Margin = 12.01% Next Allocation Level = 0.03818588 BTC Next Distribution Level = 0.04666932 BTC Base Allocation = 20.2866518 ZEC (86.07% @ 0.86071476 BTC) Wallet Balance = 1.85997453 BTC
Price increases back to starting point
The market price of ZEC increases to where it started, at
0.04300000 BTC. This is only a
1.3% increase, which is not enough to exceed the
Next Distribution Level of
0.04666932 BTC. Therefore, we are still in
NEUTRAL and no sell will occur.
Current Price = 0.04300000 BTC Current Mode = NEUTRAL Current Target = 85.60% Range Pivot Margin = 12.01% Next Allocation Level = 0.03818588 BTC Next Distribution Level = 0.04666932 BTC Base Allocation = 20.2866518 ZEC (87.23% @ 0.87232603 BTC) Wallet Balance = 1.87158580 BTC
In a single iteration of the ZEC-BTC price dipping by 10%, we have earned 0.62% profit after commissions of 0.25% per trade. As we know, there are many of these fluctuations every week, so even if the market is moving sideways, you can continually increase your investment. And if the market is trending, you’ll automatically take profit when the price moves towards your upper price, or automatically buy the dip, or buy lots when there’s a fire sale. In this way, regardless of what the market is doing, you are making profit within your risk tolerance.
Profit % = 0.62289247 Commissions Paid % = 0.03226828 Commissions Paid = 0.00060019