Cryptocuriosity II: The Anatomy of a Trade

I previously gave a little context into the wacky world of cryptocurrency trading. Having been modestly successful at it, I thought I might walk you, dear reader, through a trade – profitable or not – for your benefit. I suppose it is to my benefit too, since if I think I have an audience, I tend to perform just a little better. More on that later – or never. Anyway, here goes!

Step One: Analysis

For starters, I am currently almost totally liquid – meaning almost all of my digital assets are in exchanges as fiat (in my case, US$). I have a few minutes, so I open and click on my ETHUSD Kraken (Ethereum/US Dollars, Kraken Exchange) chart:

Simple technical analysis on

Much of what you are seeing in this screenshot is the result of Fibonacci Retracement and Elliot Wave Theory. When I’m feeling especially dorky, I might write something up on either or both… however, the Internet already has LOTS and LOTS on both, so you need not wait for me! Regardless, I had previously theorized that the price action would go one of two ways – note the RED diagonal line down and the bouncing BLUE lines marked with a two. See this for a longer-term view:

If you look carefully, you’ll see two dashed lines intersecting near the center of the chart. This represented a decision point, where, depending on one’s analysis of the market, things were going to bounce strongly up, or maybe take a dive. It’s been over a week and I haven’t seen a bounce (see blue numbered lines) and the trend is, at the moment, bearish (see red lines).

Most of the signals I’m looking for are telling me that the market is likely to go lower, but perhaps not in a drastic way. Looking at the first image, you’ll see two green trend lines, indicating price action over time. What I’ve noticed is lower highs and lower lows in recent trading, and I feel relatively confident that the trend will continue lower at this point. One sign I’m seeing that suggests this could happen soon is the possible formation of a wedge – two trendlines merging towards a single point. This usually is an indicator that the market is going to break one way or another, so it’s a good time to set up a trade.

The timing on this is particularly important because I’m going to set up a leveraged short – wherein I borrow crypto at a higher price, wait for the price to drop, then pay back the crypto. I’ll keep the difference as profit. The tricky thing with this is that leveraged trades incur fees to open, fees to rollover every four hours, and fees to close. It’s not an infinite position to hold, and over time, it’s like a leaky faucet. And since I’m not anticipating a huge break one way or the other, I’m going in with 5x leverage, which costs – you guessed it – 5x what a straight trade would.

Step Two: Set Up the Trade

After reviewing the charts, and also looking over recent articles on Ethereum which bode somewhat poorly, I decide this is a good time to try to set up a trade. I open an exchange and create a trade order with the following parameters:

  • SELL 5 ETH (valued at $664.00)
  • on 5x LEVERAGE (meaning I’m only fronting $132.80)
  • AT $132.80.

I have no Ethereum to sell, so I have to borrow Ethereum first. The exchange allows this via leveraging, in which I post a percentage of the cost (here, 20%) to buy – then immediately sell – 5 ETH at $132.80 each. Now, I will pay a 0.14% fee to open the order, coming to a whopping $1.59. I will also incur a rollover fee every four hours the position is open, so timing is critical.

A final note: looking closely at the chart, you might notice I’m setting up an order above the current cost of ETH. Why would I do that, if I’m expecting the value to go down? Well, it’s because I kind of think the price will creep up before hitting resistance at the trendline, and then when it falls again to the current price, I’ll have a slightly higher profit. Also, if the price changes direction, the fact that I’ll be closer to a stop loss value means I’ll lose less in the trade.

Anyway, all that’s left to do now is wait…

Step Three: Monitoring the Trade, More Analysis

After lowering my sell order, the market moved and the order was filled. I now have an open position set up, and hopefully will see profits grow with it.

After some hours pass, I check the order and see that it is unfilled. My analysis was correct – the price did slouch down. However, my belief that the market would test the declining trendline before doing so was unfounded. So, while I didn’t lose any money in a bad trade, I haven’t made any either.

I reevaluate my analysis, and, still convinced the market will go down, adjust my order DOWN to a price point beneath the trendline – again. I also see another wedge forming, suggesting I may get a second crack at it. Now I’m looking at selling 5 ETH at $131.70, and I’ve adjusted my stop loss accordingly.

Not soon after, the market moves up and my order is filled. Yay! See the image above. Because I set up a conditional close when I placed my order, the exchange automatically sets up a stop-loss buy order at a price higher than my sell order. If the market moves the price up to that price point, I will cut my losses and buy back 5 ETH (at 5x leverage, again, only paying 20% of the cost), and close the order at a small loss.

Step Four: In Position

Now that I have a leveraged order filled, I have opened a short position. This means I have a deal with the exchange that has not completed. Open positions represent an ongoing liability like this, so it’s in my interest to see it closed soon. My goal is to make a profit in the next day or two, and that means I need to check my position periodically.

Great news! My position has become profitable! Albeit just slightly. Actually, if I closed the position now, I would end up taking a loss because of the closing fees I’d have to pay. Going to keep waiting.

If you look at the chart above, you’ll see that my position has become profitable, at least in the academic sense. I would be crazy to close now because the fees I would need to pay to close are greater than the actual profits! Anyway, what’s more important is that the market tested the upper trendline I drew from previous trading patterns and it appears to be holding. A very good sign for a short position!

Step Five: A Lesson in Market Volatility

Well crap.

So, in spite of my best efforts, it looks like I have to settle with a break-even result. After I opened the short position at $131.70 (note the two red dots to the left) the market DID in fact drop down – to around $129.50. Too bad I set my take-profit close order at $129. Good, but not good enough to trigger a buy. Instead, the market rebounded to the trendline, and then there was a VERY short term spike to $136.25, which triggered my upper stop loss buy order at a loss. Then the market took a hard dive to $128, triggering the take-profit buy order, so that opened a new position. Not liking what I was seeing, and without time to make any other moves without new analyses, I saw that the new position had been profitable enough to cover all my fees and losses from the old one, so I closed it.

In hindsight, I could have let the position ride up to the current levels pictured here, which would have set me up with a tidy profit. However, after such an intense market fluctuation (or manipulation?), I had no reason to believe the market would not continue to tank as holders’ confidence broke down.

Step Six: Lessons for Next Time

To be honest, I am bummed I didn’t clear a profit on the short order – especially because my analysis was fundamentally correct. However, that’s a lot better than just being wrong. Where I messed up (if it can be called that) could be that:

  • I set an initial short order at a price point too high to take advantage of early action. It’s riskier to jump all-in immediately when you decide to make a trade, but sometimes it’s the only way to make fast profits.
  • I set a take-profit price too far into the channel to take advantage of natural fluctuations of the price. Call it greedy, but it was a tight position anyway, and I was trying to maximize profits for the amount of exposure I was risking.
  • I rushed to make a decision about closing the second order instead of completing a new analysis of the market after the huge swings in price. Not that there was necessarily a lot of information at the moment to indicate that the price was going to stabilize higher, but ultimately it was a decision guided by emotion – not research. Not a good precedent, and certainly something to try and avoid whenever possible.

Well, that’s it for this trade. To be honest, journaling through the process was actually pretty informative for me, so maybe I’ll do it again in the future.

And if you, dear reader, are thinking about getting into crypto trading, please read my first post on my experiences with it: Cryptocuriosity: Trading Magic Digital Money for Fun and Profit.

Author: brad

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