General terminology
The Alpha Improver report unlocks insights from your trading logs, delivered to both professional and regular traders. This report provides actionable takeaways, and it includes key terminologies and sections.
Key terminology
Position - Refers to a single currency exposure (long - buy or short - sell) over time. Positions are an initial input for report calculation, representing the starting state of currency exposures at the beginning of the period.
Trade logs - These are the input data directly sourced from the order book throughout the report period. Trade logs include essential information such as the time of each order, quantity, and price from the market. These logs serve as the minimum data required to calculate the Alpha Improver report
Trade records - Enriched trade logs that include additional information on positions already opened at the beginning of the calculation and positions held at the end of the period. This data is used for further calculations.
Risk-Free Rate - The annualized rate of return considered to have no risk.
Order Costs - The cumulative costs of orders made during the trading period (transaction fees and commissions).
Benchmark - A reference point or standard used to evaluate the performance or trading strategy.
Portfolio - The collection of positions held by investor.
Long - A trading position where a user buys a cryptocurrency with the expectation that its price will increase.
Short - A trading position that involves selling a cryptocurrency with the expectation that its price will decrease.
Sections
Performance - Provides portfolio performance metrics along with key currency observations to quantify their impact on returns.
Simulations - Identifies improvement opportunities by using a systematic approach to increase user activity and secure profits.
Strategy Profile - Offers a review of the trading approach and suggests adjustments to align with the recommended benchmark style.
Portfolio Risks - Highlights identified key currency risks and exposure within the portfolio, as well as broader holistic risks associated with the portfolio.
Trade Records - Offers currency-level trade records for a detailed retrospective analysis of each position's performance.
Performance
Provides portfolio performance metrics along with key currency observations to quantify their impact on returns.
Performance metrics
% Performance - The percentage of portfolio value with all realized returns, divided by Max. Investment (explained later).
% Realized - The percentage of all realized returns in your portfolio divided by Max. Investment (explained later).
# Alpha - The performance of your portfolio, adjusted by benchmark performance during the period.
$ Value - The market value of your portfolio.
$ Avg. Investment - The average amount of investment in single position.
$ Max. Investment - The maximum cumulative amount of funds invested in portfolio throughout the calculation period.
$ Return - The total return, calculated as the product of % Performance and $ Max. Investment.
$ Realized - The realized returns, calculated as the product of % Realized and $ Max. Investment.
$ Costs - The cumulative costs associated with all orders made.
# Avg. Hold Days - The average duration, in days, for positions held in the portfolio.
% Hit Ratio - The percentage of positions closed with a profit, often used as a measure of trading success.
% Sharpe Ratio - The percentage measure of the risk-adjusted return of your portfolio, indicating how well your investments have performed relative to their risk (see later).
Performance ratios
Hit Ratio: calculates the percentage of profitable positions. For example, if a trading strategy has a Hit Ratio of 70%, it means that 70% of the positions were profitable.
- is the performance of i trade
- is the number of trades
Max. Drawdown: calculates the maximum percentage drawdown from a peak in the value of an investment. For example, if a strategy has a Max Drawdown Ratio of 10%, it means that the maximum loss from a peak value of the investment is 10%.
- is the period of calculations
- is the portfolio performance at the time t
Sharpe Ratio: measures the excess return per unit of realized risk of the entire portfolio. A higher Sharpe Ratio indicates a better risk-adjusted return. A Sharpe Ratio of 1 or higher is considered good, while a ratio of less than 1 indicates that the returns do not compensate for the risk taken.
- is the portfolio performance at the end of the period
- is the yearly rate of risk-free return given as an input for calculation (default 8%)
- is the standard deviation between individual trades performance
Sortino Ratio: a variation of the Sharpe Ratio that considers only downside realized risk. It measures the excess return per unit of downside risk. A higher Sortino Ratio indicates a better risk-adjusted return.
- is the portfolio performance at the end of the period
- is the yearly rate of risk-free return given as an input for calculation (default 8%)
- is the standard deviation between individual trades with negative performance
Treynor Ratio: measures the excess return per unit of systematic risk (beta). It is useful for comparing the performance of a trading strategy to a benchmark. A higher Treynor Ratio indicates a better risk-adjusted return.
- is the portfolio performance at the end of the period
- is the yearly rate of risk-free return given as an input for calculation (default 8%)
- is the beta parameter of linear regression against benchmark performance
Sterling Ratio: measures the excess return per unit of the worst drawdown in an investment. A higher Sterling Ratio indicates a better risk-adjusted return.
- is the portfolio performance at the end of the period
- is the yearly rate of risk-free return given as an input for calculation
Calmar Ratio: measures the average annual rate of return against the worst drawdown. A higher Calmar Ratio indicates a better risk-adjusted return.
- is the portfolio performance at the end of the period
Jensen's Alpha: measures the average annual rate of return against the worst drawdown and the benchmark's performance. A positive Jensen's Alpha indicates that the strategy outperformed the benchmark. A negative Jensen's Alpha indicates that the strategy underperformed the benchmark.
- is the portfolio performance at the end of the period
- is the benchmark performance at the end of the period
- is the yearly rate of risk-free return given as an input for calculation (default 8%)
- is the beta parameter of linear regression against benchmark performance
Simulations
Improvement opportunities refer to hypothetical fixed rules in the trading strategy. Simulations are conducted on historical performance and are independent of each other.
Use Stop-Loss
Use Take Profit
Min. Hold Days
Max. Hold Days
Shift Open Time
Shift Close Time
Strategy Profile
Reviewed trading approach and suggestion to adjust strategy within recommended benchmark style. Suggestions to adjust strategy to predefined benchmark are also generated.
Follower - Share of long positions in all positions. Prefers buying and holding assets.
Moderator - Share of positions updated in all positions.
Specialist - Share of positions in the 3 most common currencies. Focuses on diversifying across currencies.
Alternative - Share of positions in currencies with a market cap below 10 million USD.
Holder - Share of positions held for over 10 days.
Generator - Share of positions held for over 10 days.
Portfolio Risks
Provides portfolio performance metrics along with key currency observations to quantify their impact on returns.
Porfolio (end-of-period)
$ Exposure - The difference between the total value of long positions and the total value of short positions in the portfolio.
5% Value at Risk - The estimated maximum potential percentage loss (at a 5% confidence level) in the portfolio's value in 30 days horizon.
5% Expected Shortfall - The percentage expected loss (at a 5% confidence level) in the portfolio's value that may occur beyond the Value at Risk (VaR) in 30 days horizon.
Currency (end-of-period)
% Coefficient Variance - The coefficient of variance calculated based on the previous 30 days' data. It measures the relative variability of returns for the currency.
% Implied Volatility - The implied volatility for the currency, which reflects the market's expectation of future price volatility in 30 days horizon.
5% Value at Risk - The estimated maximum potential loss (at a 5% confidence level) in the currency's value in 30 days horizon.
5% Expected Shortfall - The expected loss (at a 5% confidence level) in the currency's value that may occur beyond the Value at Risk (VaR) in 30 days horizon.
Currency risk calculation at Lotan Group
The concept of portfolio risk in Alpha Improver report is directly associated with risk-neutral density (RND) to obtain 5% Value at Risk and 5% Expected Shortfall. RND is widely used in financial mathematics to describe the market's expectation of the probability distribution of an underlying asset's future value. It is calculated by taking the probability distribution of possible future asset prices, and adjusting it to reflect the risk-neutral perspective of market participants. The RND is used to value derivatives, such as options, and to assess risk in portfolios.
At Lotan Group, the RND is based on the assumption of a finite set of moments of the probability measure that underlies the asset price. In particular, if the first three moments (mean, standard deviation, and skewness) are finite, the RND can be determined. The mean represents the expected value of the asset price, the standard deviation reflects the degree of volatility or uncertainty in the asset price, and the skewness measures the degree of asymmetry in the distribution. Lotan Group has developed in-house AI method to derive prediction of mean, variance and skewness for cryptocurrencies. The AI method is a predictive function that take option data and technical anlysis data as an input.
The RNDs used in calculation are parametrized with Generalized Extreme Value (GEV) distribution:
Lotan Group uses the GEV distribution to model the RND, and an in-house AI method to obtain the necessary metrics to parameterize the GEV distribution.
Lotan Group uses the GEV distribution to model the RND, and an in-house AI method to obtain the necessary metrics to parameterize the GEV distribution.
Portfolio risk calculation at Lotan Group
Lotan Group uses GEV RNDs parameters together with historical correlation matrix to estimate the risks a portfolio. The components are key ingredients to obtain hollistic RND on the portfolio level.
Firstly, GEV parameters are collected for 30 days time horizon for each currency in portfolio, and correlation matrix of hourly prices in last 30 days is calculated. Next, Monte Carlo method of generates random price scenario observations (50,000 samples) which is applied to correlation matrix. The method of achieving correlated price scenario observations is using Cholesky decomposition which is multiplied to observations matrix. This way a list currency price scenarios is created, which reflects market experienced dependency.
In order to achieve portfolio RND, currency price scenarios must be sumed with portfolio currency value weights. Weights can be positive or negative depending on position type (long or short).
All scenarios create vector of Monte Carlo generated observations of portfolio value. Risk values like 5% Value at Risk and 5% Expected Shortfall are directly obtained from such vector.
Currency implied volatility calculation at Lotan Group
Lotan Group employs two methods to calculate implied volatility for cryptocurrencies:
Accurate implied volatility calculations are vital for informed decision-making in trading and risk management, enabling clients to navigate cryptocurrency markets effectively.
Trade Records
Interactive currency-level trade records for a detailed retrospective analysis of each position's trade logs (input data). Below are definitions related to key trade records data types:
Currency summary
$ Return - The USD amount of return achieved for specitied currency.
Total $ Investments - The total USD value of currency positions avg. investments made during each period.
% Performance - The percentage performance for specitied currency.
Trade logs enriched to trade records
#ID - The unique identifier of each position for given currency.
Time (UST) - The timestamp in UST (Universal Standard Time) when the trade record was created.
$ Price - The USD price of the currency at the time of the trade record.
Trade Record - A description of the trade log, indicating whether it's a 'Start', 'Open', 'Close' or 'End'.
Type - The type of trade record, such as 'Long' or 'Short,' indicating the position taken.
# Quantity - The quantity of currency involved in the trade record.
$ Investment - The USD amount invested in the trade record adjusted to market prices at the time of the trade record.
$ Value - The current USD value of the currency position at the time of the trade record.
% Performance - The percentage performance of the currency position since the trade record's creation.
Alpha Improver is available as API service besides Lotan Group application. Below are required parameters to calculate Alpha Improver report. Any remaining information like market prices, risks etc. are delivered by Lotan Group.
Input
logs - CSV input of logs data (columns required: time "%Y-%m-%d",symbol "str",quantity "float").
portfolio - CSV input of portfolio data at the begining of calculation (columns required: time "%Y-%m-%d",symbol "str",quantity "float").
period min - Start date of the calculation period in the format "%Y-%m-%d".
period max - End date of the calculation period in the format "%Y-%m-%d".
benchmark - Financial benchmark for calculation (Default: "BTC").
risk free rate - Risk-free rate for calculation (Default: 0.08).
cost open - Cost of opening a position (Default: 0.002).
cost update - Cost of updating a position (Default: 0.002).
cost close - Cost of closing a position (Default: 0.002).
Output
Our API is customized to meet client needs, offering JSON or PDF reports as output options. This flexibility allows clients to choose the format that best suits their requirements.
We aim to develop Alpha Improver with deeper insights. Below is the list of further features that we are working on based on feedback from users:
Mirror trades
This analysis aims to verify how trades from one currency would perform on other available instruments. It helps expose users to different instruments, fostering a more diversified portfolio. By analyzing how trades in one instrument would fare in others, users can gain insights into potential opportunities across available options.
Moving Average Crossover
This analysis aims to leverage the crossing of moving averages as potential action signals for updates and closings. By identifying instances where short-term moving averages cross above or below long-term moving averages, users can interpret these crossovers as potential signals for adjusting their positions or closing trades.
Fibonacci Retracement Levels
This analysis aims to leverage price crossings of Fibonacci Retracement Levels as potential action signals for updates and closings. Fibonacci retracement levels are key technical analysis tools used by users to identify potential levels of support and resistance. By incorporating these levels into the analysis, users can make more informed decisions about entry and exit points.
Price Formation
Leveraging patterns or shapes that price movements create on a chart over a certain period of time can provide valuable insights. These formations, such as triangles, head and shoulders, or flags, often indicate potential future price movements. By educating users about these patterns and engaging them in analyzing price formations, Alpha Improver enhances users' understanding of market dynamics and helps them make better-informed trading decisions.