Relative Value Trading

Relative value trading is a strategy that seeks to profit from the price discrepancy between two related financial instruments. Instead of betting on the direction of the market, the trader identifies a mispricing where one asset is overvalued relative to another.

The trader buys the undervalued asset and sells the overvalued one, expecting the prices to converge over time. This approach is common in derivatives markets where assets have structural or historical correlations.

In crypto, this might involve trading two different tokens with similar utility or two different derivative instruments on the same underlying asset. It requires deep analysis of market microstructure and order flow to identify these temporary imbalances.

The strategy is market-neutral because the net exposure to the overall market is minimized. Success depends on the eventual mean reversion of the price spread between the chosen instruments.