The Next Best Thing to the Holy Grail
Traders have always been in search of the Holy Grail- a system that will enable them to beat the market and make super profits. Unfortunately, there is no trading Holy Grail. However, the Dynamic Portfolio Trading section of this article, shows you why our Futures Trading DApp is the next best thing to the Holy Grail. First of all, for the benefit of traders following less complicated trading strategies, we would explain why our Futures DApp is still a pretty good trading tool.
Token Changer is the first ever platform for distributed financial applications (DApps). We design, build and host, simple to complex financial dapps on multiple blockchains. Through a web browser interface, our dapps can be discovered and used via our website.
If you just want to bet on the future price of a cryptocurrency, the Token Changer Futures DApp offers one distinctive benefit: leverage.
The DApp provides a 3,200% (max) trading capital leverage. For instance, if you deposit 1 ether as trading capital , you get 32 ether leveraged trading capital.
Leverage is a configurable quantity and each futures dapp will use the leverage suitable for its purposes.
How can the DApp provide such high leverage without bankrupting the contract? The answer lies in the structure of the contract which is explained in the next section.
Simple Trading
Using the ETH/USD pair as an example, the diagram below shows the basic structure of our Futures DApp.
Firstly, there is a contract start and end time expressed in ethereum blocks. Secondly, there is a maximum profit price and a maximum loss price. This means that regardless of the final ETH/USD price at the end of the contract, your profit or loss is limited to the maximum amounts possible. In this case, 3% higher or lower than the contract’s opening price.
Because the contract has placed an upper limit on profit & loss, it can set leverage without the possibility of default by any counter party. Based on the assumption that price has a 3% movement ceiling and leverage is set at 3,200%, the maximum trading profit or loss is approximately 93% of the deposited trading capital.
The rest is straightforward. If you think the ETH/USD price will fall below the opening price at the end of the contract, sell ether futures. Conversely, if you think the price will rise above the contract opening price, buy ether futures.
One important feature to note about our Futures DApp is what once a contract starts, no more trading can be done. At the end of the contract, the DApp uses the opening and closing price to calculate your profit & loss.
Dynamic Portfolio Trading
For the curious and tenacious, our Futures DApp and the dynamic portfolio trading system provides the opportunity to achieve high win rates for speculative trading whilst minimizing losses when you misjudge the direction of the market.
The dynamic portfolio trading system makes one primary assumption. That you are willing to exchange some coin (outside the CCi30 Index) you already own for ether in the short to medium term.
The main idea here is that in situations where you misjudge the direction of the price movement, instead of taking a loss on the trade, you exchange a coin you do not mind selling for ether then hold ether until prices become favorable to trade out of the loss making position.
The ETH/USD Price is Going Down
You have made the call that the price of ETH/USD would go down over the next 7 days. In this situation, you would use our futures contract to sell ether futures (trade 1). At the end of the contract, if your prediction is wrong, you execute trade 2 by exchanging your chosen hedge coin for the quantity of ether matched in trade 1 and then hold ether until you can trade out at break-even or profit.
Note that Token Changer does not currently provide any trading facility to execute trade 2. This is best executed on a centralized exchange like OKEx, Binance, Bitfinex etc.
The hedge coin can be any market traded cryptocurrency outside the CCi30 index which you own and would not mind selling for ether.
The diagram above shows that there are two efficient routes for exchanging the hedge coin for ether. Route one will be to directly exchange the hedge coin for ether. Route two would involving exchanging the hedge coin for dollar (or suitable fiat currency) and using dollar (the suitable fiat currency) to buy ether.
The exchange of the hedge coin for ether should happen once the futures contract ends and should take less than 10 mins to accomplish. This ensures that the closing price for trade 1, is aligned to the opening price for trade 2.
Trade 2 should only be executed if you make a loss on trade 1 at the end of the sell futures contract period. The diagram below shows why this is so.
If price goes down (at the end of the sell futures contract) as you predicted, you will make a profit on trade 1 and there will be no point executing trade 2. You simply settle the futures contract and get paid your profit. Trade 2 only becomes necessary when you make a loss on trade 1 at the end of the futures contract.
The ETH/USD Price is Going Up
The diagram below shows what happens in opposite circumstances- thus when you think the ETH/USD price will rise within the futures contract period or at the end.
Following similar steps, you buy ether futures (trade 1) to profit from the price rise. At the end of the buy futures contract, you will make a profit if price went up as you predicted and a loss if the price went in the wrong direction. However, you do not need to take the loss just yet. It is time to hedge your 3% loss by executing trade 2, once the futures contract ends.
To execute trade 2, you will need to exchange the hedge coin for ether via one of the two routes illustrated in the diagram above.
The Hedge Coin
There are two important rules to bear in mind when executing trade 2. Firstly, the hedge coin must be a coin outside the CCi30 index and secondly, the hedge coin must be exchanged for the same quantity of ether matched in trade 1.
So, if the futures dapp order book matched 3 ether during trade 1, your hedge coin must buy approximately 3 ether in trade 2. After the exchange, there are three possible outcomes in the short to medium term, which are explained as follows.
1# The Ether/Hedge Coin Price Moves Sideways
Sideways price movement presents many break-even and profitable exit opportunities. There are at least four exit points in the chart above.
2# The Ether/Hedge Coin Price is Rising
Ether strengthening against the hedge coin (price rising) presents the opportunity to make a significant amount of profit. At exit, some or all the ether can be used to buy back the hedge coin.
3# The Ether/Hedge Coin Price is Falling
When ether is weakening against the hedge coin, the trader’s overall trading loss widens. The trader has the choice to hold on to ether in the long term or take the loss and exchange ether for the hedge coin.
Risk Factors & Mitigation
The Token Changer Futures DApp is an experimental tool which has not been tested widely. There are obvious and unforeseen risk factors associated with using such a tool to execute Dynamic Portfolio Trading. The obvious risk factors are outlined as follows.
Traders might mistakenly exchange the wrong quantity of ether and the hedge coin compared to the quantity matched by the Futures DApp (“ the contract”).
On the Token Changer DApp, the capital matched indicator (not capital deposited or leveraged) is the effective quantity of ether you should exchange for the hedge coin, if executing trade 2.
Traders might not be able to start trade 2 in a timely manner leading to the misalignment of trade 2's opening price compared to the closing price used by the futures contract (trade 1) to compute the contract’s profit & loss.
There is an indicator that counts down to a contract’s ending block as well as another indicator the specifies the ending block. Traders should watch contracts towards the ending block and prepare to execute trade 2, if necessary.
The price movement of ether and the hedge coin a downward direction might be a medium to long-term trend. This means that the trader cannot exit trade 2 at profit or break-even in the medium to long-term.
Useful Links
Ether/Dollar Futures DApp -live on the Rinkeby Testnet
