What Do You Know About the Yield Curve? How to Foresee A Strategy's Future Return at A Glance!

Many users only look at the ROI or the amount of return when choosing a suitable strategy or lead trader. In fact, this is very one-sided. It’s more sensible for you to combine more indicators for a comprehensive uation, such as Sharpe Ratio, winning rate, max drawdown, and the yield curve.

First of all, the Sharpe ratio can be simply understood as a technical parameter, and it has a calculation formula: average ROI/standard deviation of ROI, which represents the return corresponding to the unit risk. The larger the Sharp Ratio, the higher the return corresponding to the unit risk, and the more appropriate relationship between the risk and return for the lead trader, which means he/she has relatively stronger profitability. So Sharpe Ratio can be used to measure the relationship between the return and risk of the lead trader.

As for the max drawdown. It means the range of the net value of the product falling from the highest point to the lowest point within a certain period of time. The larger the max drawdown, the more the funds of the lead trader will fall, and it’s more likely to lose money when buying at a high point. Usually, the max drawdown is directly proportional to the risk. The smaller the max drawdown, the stronger the ability to control risk, and the larger the drawdown, the harder it is to pay for itself.

As for winning rate, which refers to the number of profitable transactions/total number of transactions within a period of time. The winning rate of a lead trader will affect his/her profit and loss to a certain extent, but it is not absolute. For example, if a lead trader has a total of 200 transactions, with 150 times profits and 50 times losses, then his winning rate = 150/200x100% = 75%, which is relatively high. But if the 150 profitable transactions brought a total profit of $15,000, while the 50 times losses caused a total loss of $50,000, then the lead trader is at a loss on the whole. Therefore, at this time, it is necessary to make a judgment based on other indicators.

The indicators above may require investors to have certain background knowledge in order to use them properly. In comparison, the yield curve is the most intuitive and comprehensive indicator to show the profitability of a strategy or a lead trader, and it is also the easiest indicator for users to understand, even novice users can easily grasp it.

The yield curve uses the trader’s time unit as horizontal axis and the two-dimensional coordinate curve of the strategy or the trader’s ROI as the vertical axis. As shown in the figure below, the yield curve is displayed in the form of time and yield curve, so that the copiers can more intuitively observe the overall trend of the traders’ leading ROI.

Whether it is investing, buying stocks, or buying funds, all the hard work, all the risks, all the strategies, all the thoughts, all the luck, and all the costs of investors are finally reflected in a yield curve. Therefore, the importance of the yield curve cannot be emphasized too much, which is the microscope of investors’ trading level, and can fully reflect investors’ trading ability. The following summarizes the common and most representative four types of yield curve for you. It’s hoped that you make a more comprehensive and atic judgment when choosing a strategy or lead trader.

Four Common Yield Curves: Up or Down?

First of all, a good yield curve should be a trend of steady growth without major fluctuations and with low max drawdown. We should be aware that drawdowns are inevitable in cryptocurrency investing. Therefore, perfectionists are not suitable for investment, because investment is a practical art, not an art of pursuing perfection like mathematics. To put it bluntly, drawdown means that the market situation temporarily defeats you. This is a fact, and we must admit it. No matter how perfect your layout is, it is impossible to make money in every trade, because the market will always seize the opportunity to beat you. People who have invested many times can understand that the number of times you are hit by the market is actually more than the number of times you profit. So what a good investor has to do is to minimize the drawdown.

Curve 1: Big Ups And Small Downs

This kind of yield curve is the optimal one, with a stable and upward trend overall and a low drawdown. Also there is no obvious fluctuation. With frequent transactions but excellent ability to control positions, the opitimal yield curve shows a balance between the risks and returns. The figure below is the yield curve of a certain strategy of Gate.io Strategy Bot. The advantage of Gate.io strategy bot is that it not only compares the trend of a strategy’s ROI in the past 7 days with the BTC’s ROI, but also compares its real-time ROI with the BTC’s real-time ROI. It can help users understand the profitability of a strategy more comprehensively.

Overall, although the yield curve of this strategy has fluctuated, it shows an upward trend overall. And there is no obvious drop, indicating that it has not suffered a serious loss, which means there is less probability of loss any time you copy. And when BTC is losing, it is also making a profit, whose ROI has always been higher than that of the BTC, still with a promising trend in the future. So users can consider copying it. In general, when users choose a strategy, they can make a comprehensive judgment based on its past, current and future yield trends.

Curve 2: Big Ups And Medium Downs

On the whole, its return is not worse than curve 1, but there is a larger fluctuation, with a high max drawdown, without losing the principal. Users need to be very familiar with and trust the characteristics of the position portfolio in order to patiently hold positions during periods of large fluctuations. Such a curve represents excellent ability to control positions but average ability to control risks. In general, it is a test of heart.

This is the yield curve of a certain lrad trader of Gate.io Copy Trading. On the whole, the lead trader is relatively stable and reliable in leading whose ROI is overall surging. There is also an intermittent, small decline in ROI, but he takes good control of the stop loss, and losses of deposit didn’t occur, indicating that the lead trader has enough means to deal with the volatile market situation. You can consider following him.

Curve 3: Big Ups And Big Downs

This kind of yield curve has a large increase, but also a large decline, which cannot effectively balance the returns and risks, and even leads to a loss of principal. Most beginners will have such yield curve with poor control of positions and risks. The principal has been eroded in the process of a large drawdown, which is a great test of mentality. In this case, investors will be extremely anxious. It is a typical example of making money by luck. It will take a long time to hone before it may rise to the state of yield curve 1 and yield curve 2. Such a curve means that the investor has some awareness of controlling positions, but a weak ability and awareness of controlling risks.

Curve 4: Small Ups And Big Downs

From the yield curve, it can be seen that the investor’s mentality was good at the beginning, and there was a short-term profit, and then experienced a continuous plunge. After the loss reached the bottom, the investor struggled and rescued, who, finally, gave up the transaction directly when he found that his efforts didn’t work. With a chaotic position, the investors lacks patience in holding positions. It is in a long-term suspension period after he frequently changed positions, which shows that the investor needs to re-examine the market to find out his own shortcomings, and remedy the defect bit by bit. But most people may not have such determination and perseverance, so they leave in a hurry. In this case, investors can consider using trading aids - Strategy Bot & Copy Trading- to help themselves manage their positions and regain confidence in the market. With the help of trading auxiliary tools, users do not need to keep an eye on the market to study and judge complex market conditions, and can win effortlessly.

Conclusion

The yield curve is a summary of the winning and losing conditions of the investors in the market game. Business are like battlefields, and so are investments. Your energy, research and judgment, investment level, control ability of risk and return as well as on-the-spot adaptability will only be reflected on the yield curve. Therefore, the yield curve can often reveal the overall quality and ability of an investor. If you want to obtain the best yield curve like curve 1, you need to conduct in-depth research in several major directions, such as risk control, position control, and mentality control. Through careful thinking and analysis, you can find out your own deficiencies, and constantly correct them.