Bitcoin Savagery at Margin Trading

Coin Observatory
Sep 4, 2018 · 7 min read

The Guide from REKT to Success , Part 1

The Cryptocurrency Mania phase of 2017 brought many market participants into the digital asset marketplace. A parabolic trend accompanied by “rags to riches” stories fueled a bubble in the form of a speculative rally, drawing in more and more investors. Some were seasoned, yet the majority were engaging in market operations for the first time. The total market cap of digital assets grew from $17.7 Billion on January 1st 2017 to a staggering $616 Billion in December. The “buy and HODL” strategy worked great until January 17th of 2018 when the market entered an era of decline as Bitcoin proceeded to lose some 70% in value.

The Big Short was on! Many unsophisticated investors and the newly self-proclaimed traders started looking for ways to hedge, short sell, margin and leverage trades in order to capitalize on the volatile swings to profit from the market-wide downturn.

This trend has been ever growing as Bitmex, the easiest exchange to leverage digital assets on, has been experiencing an influx of trading volume. And the term REKT has become the darkly-humored highlight of the majority of Bitmex’s not-so-successful stories. In this article I will highlight some of the most profitable margin trading techniques that go beyond buying and selling.

Disclaimer: I am not a financial adviser and this is not financial advice. I am writing this article from the perspective of a market technician, trading community mentor, fund manager, and director of a Market Intelligence R&D firm, with a heightened understanding of markets and technical analysis.

In Part 1 of this series I will cover the psychology of what makes a margin trader successful, along with how we identify keys entries for a sustainable long position.
Part 2 will cover when we profit take, hedge or short selling, and stop losses.
Part 3 will encompass how we treat trading ranges, position sizing, and leverage.


Psychology: The Hedge

“Hedge: A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.” -Investopedia

The first mistake traders engage in when margin trading is not identifying the purpose of their trade, nor the longevity and sustainability of their position. The next mistake is unidirectional trading. If one is simply entering a trade to extract value from the market, it might be that they’re trading with an itch for profit out of a feeling of desperation. As a fund manager I opt for trading long-term futures without incurring interest, with the goal of maintaining a buy or sell throughout expiry, or sooner if and when prompted by the market.

Selling Short is a means of profiting in a downtrend, and we refer to this practice as “hedging short.” We tend to hedge a short position at what we believe is the peak of a rally, or to secure profits from a long position without actually profit taking at an interim peak when our analysis tells us it’s pullback time. Other hedges come in the form of selling a large position when we expect the entire market cap to pullback in order to protect the overall value of the fund and profit during a bear cycle.

We employ two margin trading pools, the first being in the form of a margin trading desk. Leveraging long contracts against short contracts and latter pool to hedge large positions in order to protect our digital asset portfolio value in a market downturn. The objective is sustainability and profitability while minimizing risk and maintaining exposure.

The contract types we hedge are always futures, whether long or short, and never perpetual positions. Funding and interest fees are never a worry and our objective is to secure a sustainable position with the slightest likelihood of being liquidated, along with a defined risk in the form of a stop-loss.

The chart below demonstrates what a perfect execution of hedged ranges would look like, by our standards. In Part 2 of this series we will further detail hedging concepts. The futures contracts hedged in this scenario, December long positions, September short position.


The Long

When trading futures, 90% of the effort is attempting to calculate the lowest risk entry, with a practically low likelihood of triggering our stop-loss, and absolutely no chance of liquidation.

Technical prowess and knowledge of formations and chart patterns, along with our proven reliable indicators, come second to patience. The impatient long will get stopped out over and over resulting in depletion of funds.

Identifying a “bottom,” or interim bottom, is dependent on several factors. I will highlight two reliable factors that prompt a long position entry. Reversal formations in the section and price discovery in the next. For increased confidence, we tend to long when one or the other is present, and increase our position when the second materializes.

Reversal formations: These can take on various forms, as I’ve illustrated below, and are some of the more reliable ones we’ve encountered in 2018.

Falling wedges:
Typically classified by four touches of support and resistance, with a cone structure, a falling wedge is a reversal pattern. April’s reversal was signaled by a falling wedge, which was first spotted on a linear (non-logarithmic) chart.
When longing a falling wedge, the long trade is placed at the retest of the wedge.
The initial breakout must re-test the wedge for a safe long entry.
A proper stop-loss for this formation is below the previous low.

Ascending triangle bottoms: In this case the ascending triangle is inverted. If you’re not familiar with inverted triangles, I recommend Richard W. Schabacker’s ‘Technical Analysis and Stock Market Profits” as a reference.

Inverse head and shoulders: As one can see in this example, the breakout upon the third touch of resistance led to a 25% upward move over the next 7 days.


Ninja Long Entries & Price Discovery

Price discovery failure- think of this concept as a guerrilla tactic employed by knife-catching market circus freaks; people who essentially go long when the influx of buy volume is fueling the rebound of a falling knife near the yearly lows. This takes patience, screen watching, and an amplitude of intuition.

In the above given chart formations we employed this tactic twice as the market gifted us entries of long positions at $5,800 and $6,040 at two different relative interim cycle bottoms.

Price discovery is the result of short selling, in concept: how far down can bears push the price? Once price discovery fails, an influx of buy volume flows in, resulting in a faster rate of change to the upside, and back to previous levels. That initial first low should be noted.

In real-time we prefer shorter time frames to identify these entries- 15 minute candles and below, as the volume indicator, and the buildup of Bvol is rather distinct at these time frames. Using these smaller time-frames also allows for catching the third or fourth high volume fueled candle.

The chart below along with the entry at $5,800 are from the apex of the Inverse Head and Shoulders formation reversal.

The next chart represents our entries at $6,040, around the apex of the later Inverted Ascending Triangle reversal formation

Catching the knife is a risky dying art. It takes keen eyes, confidence, impeccable timing, and a proper stop. We typically knife-catch on low leverage, and as the trade goes in favor leverage is increased to 50x as we get more comfortable with our positions.

At the completion of the reversal formation, a double-up is granted to secure a worthy position. BTC has the tendency to go on a yearly bull run and if we catch a run from a cycle’s yearly bottom, on 50X leverage, fortunes can be made from minimal effort. That’s why we go after intelligent, sustainable positions, instead of over-trading.


Thank you for tuning in for Part 1 of this series, please give us a clap, and follow us. You can also share this writing with a friend in need. We look forward to polishing part 2 shortly. In the meantime if you’d like to connect with our team or trading community, visit us at www.coinobservatory.com

Author: George Saber
Editor: Matthew Pink

Coin Observatory

Written by

Bitcoin Analysis, Digital Asset Management, Trading Community Mentorship, Wealth Management. www.coinobservatory.com

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