Reversal Trading is a Gunbot method to accumulate assets while prices drop, without spending more than already invested before the dump.
Do you like using stop loss orders? Reversal Trading is a very elaborate kind of stop loss — one that uses the stop loss proceeds to accumulate more quote units while the market goes down.
Using Reversal Trading (RT) is not exactly easy, it’s probably one of the least understood feature Gunbot offers.
This is going to be a longer read. In this article I’ll try to explain how to use RT effectively, and describe the risks involved with every step of the process.
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What Reversal Trading actually does
What RT does is a multi step process, here’s a simple example:
- Your trading strategy places a regular buy order. Then a dump happens.
- The RT process starts and places a sell order, at loss. Market dumps more.
- RT now uses the proceeds from the previous sell order and buys more units back. Prices start rising again.
- RT kept track of all orders since step 1, including fees paid. When prices rise enough to reach the break-even point of this group of trades, a regular strategy sell order can be placed and finish the RT process.
This process does not have to be 4 steps long. It will just keep trying to accumulate when rates keep dropping, repeating step 3 and 4.
RT is a stop loss process that uses the proceeds from the stop loss order to accumulate more quote units.
A few things to keep in mind when reading the rest of this article:
- The goal of Reversal Trading is always to accumulate more quote units.
- It is central to RT that at no point extra base currency gets invested, it completely works with the proceeds from the first stop loss order.
Sounds good, are there risks involved?
YES. Trading is always risky, Reversal Trading is no different and comes with it’s own set of advantages and trade-offs.
Let’s go over the main difficulties that can happen during the RT process, referring to the steps shown in the image above:
- If prices do not drop enough after step 2 to proceed with an RT Buy order, then the RT process will fail to accumulate. It will buy back quote units when price reaches the break-even point and then attempt a profitable strategy sell order. If prices do not reach break-even, you’re left with an imaginary bag of reserved quote units, this is often jokingly referred to as “RT hodling”.
- If you set a very small percentage drop as trigger for step 2, then it’s likely that prices will bounce up again by the same percentage. What follows is a buyback order, where you will lose a bit of quote units compared to the initial buy order. When you don’t pay attention to the spread between bid and ask when setting up RT for a trading pair, it’s possible to instantly hit a buyback after an RT Sell, just because the bid/ask spread is as big as your setting for placing an RT Sell.
- If you set the trigger for an RT Buy (step 3) at a smaller percentage drop than for the previous RT Sell, you will not accumulate quote units at all, instead you’ll lose quote units every time an RT Buy happens!
Buyback orders are a real risk, they lead to a loss of quote units every time they happen. This pushes the break-even point upwards.
“RT hodling” is not fun, but in the end you’re not worse off then when you would have used a regular stop loss.
Add complexity: triggers and trade types
The available options for reversal trading are actually a lot more complex than the basic — and essential — steps described above.
The good news is that you don’t need to use all the options to effectively accumulate. The bad news is you’ll want to use some of the options, so you’d better learn about all the implications.
Let’s look at all available types of RT orders, how they help accumulation of quote units, and how they can be triggered:
RT Sell (essential)
Trigger: A percentage below any last buy order. Configurable with
Accumulates? No. This is a stop loss type of order. Naturally, this has a negative effect on quote accumulation.
The proceeds from this sell order will be used for the next buy order.
RT Buy (essential)
Trigger: A percentage below the previous RT Sell order. Configurable with
- Set a trailing buy limit to catch lower rates and accumulate more. Configurable with
TRAIL_ME_BUY_RANGE. I strongly recommend using this option.
- You can use the Gunbot trend forecast indicator as additional confirmation when
TRAIL_ME_RTis used. Configurable using
Accumulates? Yes, but always make sure the distance between an RT Sell and RT Buy order is bigger than the distance between any buy and the next RT Sell.
When you use trailing, you can experiment with smaller distance and larger trailing range, it’s possible you’ll accumulate on average and miss less RT Buy orders. Not missing RT Buy orders is a very good thing.
The proceeds from the last RT Sell are used to invest in quote.
RT Buyback (essential)
Trigger: Price reaches the break-even point after an RT Sell or RT Sell Up order. This type of order is not user configurable.
Accumulates? No. This has a negative effect on accumulation. The proceeds from the last RT sell are used to buy back quote units, the result will be that you buy less units than sold in the previous order.
Try to avoid buybacks at all cost!
4. RT Sell Up (optional)
Trigger: A percentage above an RT Buy order, using a trailing range for reaching an optimal sell point. Configurable with
You can use the Gunbot trend forecast indicator as additional confirmation when
RT_SELL_UP is used. Configurable with
Accumulates? Indirectly. As this trade happens above the last RT Buy rate, it generates more available base currency for the next buy order.
The next trade can then accumulate more because it has more funds available compared to the situation where the previous order would have been a regular RT Sell order.
RT Buy Up (optional)
Trigger: A percentage above an RT Sell order, as long as this rate is below the break-even point. Configurable with
Accumulates? No. This type of order is basically the same as a Buyback order: it buys back quote units at a higher rate than the previous sell order.
This will always result in a negative affect on accumulation.
Why use these optional RT trade types?
When Reversal Trading was first introduced in Gunbot, there were no optional trade types like RT Sell Up and RT Buy Up. These were introduced because they solve problems specific to RT.
Remember “RT hodling”?
It can happen that you are weeks into Reversal Trading and accumulated loads of quote, then suddenly you miss one RT Buy order and rates go up a lot, but not nearly enough to get close to the break even point where a normal buyback order would occur. You are in no man’s land with no next trade in sight.
This is where RT Buy Up can be great: it acts as a sort of reverse stop loss. You will lose some of the accumulated quote units, but the result of buying now will be better than waiting it out till prices eventually reach break-even. Better as in: it will leave you with more quote units.
In the same no man’s land way below break-even, it can happen that prices no longer go down and it becomes impossible to accumulate more quote using regular RT Buy orders, which always happen at a lower rate than an RT Sell.
RT Sell Up allows for trading the now sideways market, while still working towards the goal of accumulating more quote units.
Got it? Here’s more tips for using RT
- Always check the percentual spread between the highest bid and lowest ask in the order book for the trading pair you want to enable RT on. Make sure to set
RT_GAINsignificantly higher than this spread, otherwise you’ll risk entering a loop of almost immediate RT Sell and Buyback orders.
- Always make sure that RT_BUY_LEVEL is set higher than RT_GAIN plus the expected trading fees for two trades. If you don’t do this, you won’t accumulate quote — which is the goal of RT. The exception to this rule is when you use trailing for RT Buy orders and want to risk not always accumulating quote and instead prioritize not missing RT Buy orders.
- When planning your RT settings, always keep in mind that not reaching RT Buy is a small disaster. Try to find a balance between settings that accumulate great and settings that would never miss a trade. Optimal settings really depend on the expected volatility of a trading pair, I don’t think there are “best settings” for RT in general.
- Consider using one round of DCA before entering RT. This creates an extra buffer between the first RT Sell order and a possible Buyback order at break-even. It can help avoiding buybacks.