Bitcoin Futures Basis Trade

Entry Logic

• Enter a long spot, short futures position when the futures basis is above 5%.
• Confirmation requires the basis to be stable for at least 1 hour.
• The entry timeframe is the 1-hour chart.
• The setup is valid when the futures contract is trading at a significant premium to the spot price.
• This strategy is market-neutral and relies on the convergence of futures and spot prices.

Exit Logic

• Exit the trade when the basis converges to zero or becomes negative.
• No scaling out is required for this strategy.
• No trailing stop is used.
• Exit the trade if the basis widens by another 2%.
• An opposite signal (negative basis) triggers an immediate exit.
• The trade is closed when the futures contract expires.
• Exit if there is a significant drop in open interest.

Stop Loss Structure

• A hard stop is placed if the basis widens by 3%.
• No soft stop is used.
• The maximum dollar loss per trade is determined by the position size and basis widening.
• The maximum percent loss is 5% of the allocated capital.
• The structural stop is the liquidation price of the futures leg.

Risk Management Framework

• Risk no more than 2% of the trading account on a single trade.
• The maximum daily loss limit is 4% of the account.
• The maximum weekly loss limit is 8% of the account.
• A maximum drawdown of 20% will trigger a 2-week trading halt.
• The risk-reward ratio is not applicable for this arbitrage strategy.

Position Sizing Model

• Use a fixed capital allocation for each trade.
• No volatility adjustment is needed.
• Conviction is based on the size of the basis.
• Do not scale into trades.
• Do not scale out of trades.

Trade Filtering

• Avoid trading during periods of extreme market volatility.
• The setup requires a clear and stable basis.
• This strategy is designed for Bitcoin futures.
• The optimal trading time is when the basis is at its widest.
• Avoid trading illiquid futures contracts.

Context Framework

• The trend direction is not relevant for this strategy.
• The VWAP relationship is not relevant.
• The moving average relationship is not relevant.
• The range location is not relevant.
• Higher timeframe alignment is not relevant.

Trade Management Rules

• No breakeven stop is used.
• No scaling out is used.
• Do not add to the position.
• The trade is held until convergence or expiration.

Time Rules

• The optimal trading window is when the basis is widest.
• Avoid trading near contract expiration.
• Pay attention to funding rate payments.

Setup Classification

• A+ setup: Basis is above 10%.
• A setup: Basis is between 5% and 10%.
• B setup: Basis is between 2% and 5%.
• C setup: Basis is below 2%.

Market Selection Criteria

• Trade only Bitcoin futures on major exchanges.
• The futures contract must have high liquidity.
• The basis should be significant enough to cover transaction costs.

Statistical Edge Metrics

• The expected win rate is over 90%.
• The average win is the initial basis minus fees.
• The average loss is the stop-loss level.
• The profit factor is very high.
• The expectancy per trade is positive.

Failure Conditions

• The strategy fails if the basis continues to widen indefinitely.
• Avoid this setup during periods of market panic.

Psychological Rules

• Maintain patience and hold the trade until convergence.
• Do not be shaken out by short-term price fluctuations.

Advanced Components

• Use a script to monitor the basis in real-time.
• Filter trades based on the term structure of the futures curve.
• Consider the correlation with other cryptocurrency futures.
• The strategy is self-contained and does not require multi-timeframe analysis.

Location

• The setup is strongest when the market is bullish and funding is high.
• The setup is weakest when the market is bearish and funding is negative.
• The location of the trade is determined by the exchange with the highest basis.