Inventory Risk Management – Today we will start talking about risk and risk management which is the most important factor that is part of any trading activity.
While it may seem more exciting to visualize and imagine future profits and become the next Warren Buffett, the reality and appeal of investing is a small part, and perhaps the most important part, is trying to understand what can go wrong and how to mitigate it. potential losses.
Inventory Risk Management
There’s a lot to talk about risk and risk management, but today we’re going to focus on one major market-related risk: inventory risk.
Benefits Of Inventory Management & Systems
As always, we invite you to join our #trader-chat on Discord and discuss with the community how you can improve your market making strategies.
You provide services to other traders by offering services to buy and sell assets from and to others, for which you are paid the difference between the bid and ask orders (buy low, sell high).
In order to provide this service, the market maker must have a certain amount of capital in inventory to create orders and close trades, and there is value associated with that inventory.
A market participant already knows that all traders must be able to monitor whether or not they are making a profit because asset prices are constantly changing.
Inventory Risk Management
One simple way to monitor performance is to compare the total price of the assets held by the trader.
On the first day, the present value of your assets is 10,000. Even if you don’t actually own USD, just BTC and ETH, you can convert your BTC and ETH to 10,000 at the current market price. .
The value of inventory changes due to changes in market prices, as the value of assets relative to comparable assets may change.
If you didn’t trade (HODL!), on day 2 you will have the same amount of BTC and ETH from your original portfolio.
What Is Inventory Management Software? In 2022
However, as the USD value of these assets changed, the inventory price decreased to USD 9761.38. BTC went up and ETH went down.
Net asset value calculates the current value of all assets in a portfolio relative to a specific benchmark or reference asset (eg, US dollars).
Benchmarks for determining value vary from investor to investor. For example, investors in the United States can use US dollars, while investors in Europe can choose euros. Because currently most of their expenses (food, rent) are still denominated in USD (or Euro) and fiat still measures their wealth and purchasing power.
The primary objective of a market maker is to increase the overall value of the stock over time. A more common and popular way to invest is to buy assets that will increase in value in the future. It involves “target” investing, buying “cheap” assets, and betting that asset prices will rise over time.
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Conversely, a market participant seeks to increase the value of a portfolio by finding increasing bid-ask spreads and accumulating them over time. A market operator often offers to buy and sell an asset at the same time, at a price slightly lower than the price at which it is offered to sell. If a market maker is able to complete a buy or sell, it can capture a portion of that difference, the “bid-bid spread.” The more times a market maker can complete this cycle of buying and selling, the more profit they can collect.
As I mentioned in the first Academy article, the ideal situation for market participants is when prices move without any trend.
When the price moves to a certain range, the market maker’s purchases and sales are filled with equal frequency, allowing the market participant to accumulate incremental profits.
For example, if the price starts to decline, his buy order will start filling, but not his sell order:
Pdf) Risk Assessment Model In Inventory Management Using The Ahp Method
The result of this situation is that the marketer will begin to increase the stock of depreciable assets, which will cause the total value of the inventory to decrease over time.
Eventually, the price reaches a profitable level and the market maker can sell the stock at a profitable price. However, if this situation continues and prices continue to fall, the problem is that all the inventory of the market maker will be locked in one side.
At some point, the marketer will have to decide whether to shut down, wait for better prices, or start selling inventory at a loss to stay in business.
Like the manager of a retail store, it has started to increase its inventory and buy more products from suppliers at better prices, but its customers are not interested in buying its products.
The Top Features Of Effective Inventory Management
Although the market maker creates buy and sell orders, there is no guarantee that either side will be filled. In the example above, bids are always filled, but no sales are ever made. It also exposes the market maker to the risk of changes in stock volume. For example, a market participant may accumulate assets that are losing value; conversely, a market participant may end up selling an asset whose value is rising.
Inventory risk is the probability that a market participant will not be able to find buyers for its inventory, resulting in the risk of having more capital at the wrong time, e.g. hoarding assets when prices are falling or selling early when prices are rising. Inventory Risk Management with Humingbot
Inventory risk is a key market risk. This is why Hummingbot allows for many strategic adjustments to reduce inventory risk, and why our team continues to work on more features in this area.
This flexibility allows market participants to reduce operational risk in a variety of ways and make adjustments to their underlying strategies.
Add Spreadsheets To Your Risk Inventory
Command displays a summary of historical trades and changes in total assets since the bot was launched.
This is a good way to visualize how much inventory has changed on each page and compare it to the total.
As mentioned above, there is more BTC than USDT in the inventory and the bot is selling more than buying.
This parameter can be used as a stock hedge, for example, if the marketer sees a trend in one direction: if the price of BTC rises, the marketer can start accumulating more BTC.
Consequence Driven Ics Risk Management
This is especially true if you are trading a non-USD pair (such as ETH-BTC) where the trader can assess the value of each USD-linked asset and adjust the inventory asymmetry if one asset is deemed to be higher. is useful. value in the future.
Irregular inventory is like constantly balancing a pendulum; As the trader accumulates more funds, the Hummingbot adjusts the order size (buy less, sell more) to try to get back to the target holdings.
Inventory irregularity is designed to reduce the risk of excessive fluctuations in inventory quantities. Attempting to maintain a target ratio such as 50% helps marketers continue to bid, ask parties, and capture bid-ask spreads.
According to the parameter, the marketer can set a delay time for the bot to create the next new order when the previous order is filled.
Supply Chain Management: Inventory System Managing Risks
For example, if filled_order_delay = 300, when an order created by a bot is filled, the next pair of orders will not be created until 300 seconds later.
This helps to manage periods when prices tend to rise. For example, in the chart below, bid orders continue to be filled when the price is falling and the order is renewed.
If this repeats and continues, the marketer can quickly accumulate a large amount of capital in just a few order recovery cycles. In the example above, the trader bought the fund 5 times.
By creating a lag between orders being filled and new orders being placed, this reduces the order gap, inhibits potential capital accumulation, and allows some time for price trends to stabilize.
Comparisons To Current Risk Handling Methods
As you can see above, because the bid order was filled in period 1, the bot did not place an order in period 2, 3, or 4. Therefore, during this decline, the bot bought only twice (periods 1 and 5). the filled order is not activated, I will buy the robot for all five periods.
Pending Orders is a feature that instructs Hummingbot to process a combination of buy and related sell orders in parallel. If one page fills up, the bot will leave the other matching page unfeatured, creating opportunities and opportunities for that page to fill up over time.
In the example above, a purchase order for period 1 has been filled. However, because the pending order mode is enabled, the first period 1 sales order is not canceled during the recovery cycle (period 2) and remains
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