Friday, February 14, 2014

Bitcoin Trading Ten Commandments

Encryption We Trust

Lets keep this short. Here are the Ten Commandments to make money trading in Bitcoin. Detailed explanations follow where needed.
  1. Do not follow trollbox advice
  2. Buy low, sell high OR sell high, buy back low
  3. Know your break even number
  4. Never let a Whale (big trader) buy cheaper than you, stack up on their position if necessary.
  5. Look up and down the orders list and find the big orders
  6. Cut loses or cost average when you make a bad trade, but let profits run
  7. Be patient and do not be mastered by market sentiment
  8. Buy when the market is selling, sell when the market is buying
  9. Read the chart first
  10. Do not trade to fiat
Where do you trade Bitcoin? You trade on one of the Bitcoin exchanges, but start small and work your way up to larger trades. Here are the "how to" details...

1. Do not follow trollbox advice

A trollbox is a little chat window commonly implemented by Bitcoin exchanges. It is full of people trying to manipulate new users into bad trades. Some people use it to discuss actual issues about the market, but you should never blindly follow advice given in the trollbox, and never click a short url link.

Instead, take the time to read the news or google the trollbox information that catches your eye.

2. Buy low, sell high OR Sell high, buy back low

There is no difference between buying low then selling high and selling high and then buying back low. You should do what puts you in a position for a follow up trade. For example, you can BL-SH and consider that the beginning of a SH-BL.

3. Know your break even number

You should use excel or something to track break even numbers.  Transaction costs are greater than they appear, .2% is actually 0.4004% for a full trade.  I wont bore you with the math...

**update* I should bore you with the math**
Break even is [Buy Price] * [trade fee on buy] * [trade fee on sale]

Long (buy low then sell higher): [Price] * [1 + fee] * [1 + fee]   i.e.  1 * 1.002 *1.002 = 1.004004
Short (sell high then buy back lower): [Price] * [1 - fee] * [1 - fee] i.e. 1 * 0.998 * 0.998 = 0.996004

Also, consider that some big traders get "VIP" transaction fees, normally about .15% or .05% lower than everyone else. this translates to more than .1% lower selling prices on each trade.

4. Never let a Whale (big trader) buy cheaper than you, stack up on their position if necessary

This is a tough one. If you allow a whale to buy 1,000,000 coins at .00001 less than your trade they will be able to sell at a profit lower than you. This might lock you out of completing your trade and leave you at a loss or completely out of the market.

Big players will sometimes place huge buy and sell orders simultaneously with less than .2% price difference. Small traders that place orders in between become trapped after one leg of their trade. You are forced to buy or sell from the whale or simply wait indefinitely to complete trades.

The counter tactic is to place a buy order on top of the whale. If 1000 coins are traded at a price, the goal is to reduce the amount of coins purchased by the whale and stop the whale from making both legs of their trade. Wait until they pull the trap and then sell your coins.

This is an important tactic because governments, banks and other players who are protecting establishment power use their massive resources to undermine crypto currencies. As a trader, you need to be prepared to fight these powers. You are the underdog, so be prepared to fight all who rob and plunder.

5. Look up and down the order list and find the big orders

It is very informative. You can learn what the big players are preparing to do in the market.

6. Cut loses or cost average when you make a bad trade, but let profits run

This is one that is pretty hard to follow. It seems easier to buy and then set a reasonable sell price or vice versa. However, this is where big profit can be found if you are patient, precise, confident and follow the other commandments.

7. Be patient and do not be mastered by market sentiment

Do not fall prey to the whims of the moment. Panic buying and panic selling are a traders worst enemies. Often, it is even harder to wait for the top or bottom of the market. It is better to wait longer, a lot longer than your emotions lead you, unless you have a specific reason.

Some traders add that you should not trade during low volume because the market is easier to manipulate.Sometimes a small, well timed order can fool the automated trading programs (bots) into buying and selling at the wrong time.  This is done by manipulating technical indicators across threshold values.

8. Buy when the market is selling, sell when the market is buying

Position yourself so that panic traders are selling to you cheap and buying from you at a premium.

9. Read the chart first

Compare other exchanges (BTC-E,Huobi, Bitstamp,BTC-e,Crypto-trade, etc), KDJ indicators (or other indicators) and multiple timeframes while developing trading strategy. Review this chart to understand what this stuff means.

10. Do not trade to fiat

Use alternative coins during downturns as safe harbor and to trade for more Bitcoins. Many alternative coins lag, lead or are not very reliant on the price of Bitcoin. Learning these alternative markets turns crashes into buying opportunities.

*update* expanded per comments request.

While charts show that alt coins like Litecoin (LTC) follow the price trends generally of Bitcoin (BTC), there is often a lag in the price change or at times they lead the price change. The scale of the change can also be very different. This affects ratios which are the basis of a many alt coin markets. (i.e. LTC/BTC)

Some of this is due to the fact that there are always new alt coins coming to market. Sentiment players try to jump on down turns in bitcoin to find people willing to trade bitcoin for the latest shiny coin. At other times, an alt coin may crash and money might rush into a safer alt coin or back into bitcoin.  There are markets for many alt coins based purely upon Bitcoin and Litecoin.  You may find a XYZ/BTC or XYZ/LTC on exchanges (where XYZ is a generic alt coin symbol).

Another reason that trading to alt coins is preferable to trading to fiat is to avoid missing large market upswings. Alt coins may lag or have a different scope, but when prices jump up, you aren't left behind.

*Notes and special thanks to the traders who reviewed this article:


This was written to give crypto traders a leg up on the big players and market sentiment players.


Kalashnikov said...

Thank you for posting this. One question. I've heard of moving to alt coins during a downturn instead of fiat. I get the general idea, but at least on BTC-E, the charts for the alts are almost point for point identical with bitcoin. Can you elaborate on this strategy?

Anonymous said...

This is my first time i visit here. I found so many entertaining stuff in your blog, especially its discussion. From the tons of comments on your articles, I guess I am not the only one having all the enjoyment here! Keep up the good work. instant bitcoin mixer

Doo Doo Econ said...

This is the default comment box and some people have problems.. so there arent as many comments as there could be...

I will add an addendum about trading to alts to explain it more.

historypak said...

Great write-up, I am a big believer in commenting on blogs to inform the blog writers know that they’ve added something worthwhile to the world wide web!.. said...

fortunately, the unfold among the bid and the ask rate is very low, most of the time ranging between 1 and a couple of bucks. At a modern-day bitcoin fee of $819, this amounts to an introduced cost of 0.1 to 0.25%. You simplest pay the unfold if you want to go into a trade proper away with a marketplace order. if you placed a restriction order to shop for and you’re inclined to attend till someone wants to sell, you should buy your bitcoins at a small bargain on the bid and later promote them on the ask, pocketing the unfold within the technique. bitcoin trading 

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