I wanted to share a basic trading strategy that I have devised and has been working for me during this BTC bull market. It has resulted in nearly doubling the gains versus just holding bare BTC.
My trading goal:
To increase the amount of earnings during a bull market cycle when BTC is reaching new all-time-highs (ATH) to greater than if I only held the underlying asset.
Disclaimer: I am an idiot and you should not listen to this advice. Following it will likely make you poor. I have made several poor trades using stock options in the past costing me tens of thousands of dollars and I’m likely to make these same kind of mistakes in the future.
My key and likely flawed assumptions:
For this trading strategy to be effective, there are a few key assumptions that you have to believe in. If you don’t believe in these, this leveraged trading strategy is probably not for you.
- BTC go up; Every cycle we see higher lows, and higher highs.
- This is the reason why we ONLY long BTC. If we start shorting it, we are competing against major historical trends.
- BTC goes through bull and bear market cycles, which seem to be correlated with supply reduction events (halving).
- The goal of this trading strategy is to place leveraged positions during up-trends
- People FOMO into BTC, and whenever new ATH has been reached, this typically results in a upwards breakout.
- BTC has long term viability as a store of value and at the very least, will eat away gold and perhaps even real estate as a means of storing value.
- My price target for BTC in the next 3-5 years is $250K+ USD
Managing risk:
Trading using leverage is risky AF. If you are maxing out your margin and trading at 5x, a 20% reduction in price means your account balance is will be liquidated in order to prevent losses being eased by the exchange you are working with.
When using this strategy I mitigate my risk by:
- I never opening a position which is greater than 50% of my margin available
- I always create a stop loss which activates if the price decreases more than 2-5% of the opening value price.
Keep in mind here that if you stop out a 5% loss at 5x leverage is a 25% loss on your starting capital. You have to be really mindful of the risks that you are taking here and don’t risk more than you are willing to lose.
One strategy I’m experimenting with right now is “scalping” my position after a significant gain, that is, holding a portion of the position open in order to capture future gains, but de-risking and reducing the amount of leverage I am using by selling half of my leveraged position.
THE SUPER SECRET STRATEGY:
Step 1: Use TA to identify an entry price point.
You’ll need a basic understanding of technical analysis around trend lines, resistance and support. I personally think TA is magic hogwash charting, and yet I’m using it here.
ATH (All time high) breakouts:
Look at the Green line on this weekly chart, the previous ATH was $19583 USD in December 2017 lets zoom in to see what happened when this ATH was breached.
The price kept trying to break through this line, even having the market react like there was a double-top when it failed to break out, nevertheless, it kept trying to breakthrough and the second it did, boom, a 32% increase in 13 days.
Step 2: Set a stop loss buy order at your desired price.
Lets say you have 10000 USD collateral (in BTC or other assets) in your Kraken account. I would only risk up to 5000$ of this to mitigate liquidation risk (more on this later) and then take a 5x long position based on this.
Example position:
Collateral in exchange account: $10000 USD
Maximum margin used: 50%
Leverage: 5x
Initial position size: 25000 USD
Target Entry price: 20150 USD
Step 3: Set a stop loss limit sell order to de-risk your position.
I always create a stop loss which activates if the price decreases more than 2-5% of the opening value price.
A smaller margin on your stop loss (like 2%) means that high volatility in the market could sell your position for a loss, even though it ends up going up an hour later. For this reason, i usually use a higher percentage loss, which means i’m risking more, but allows for higher volatility swings.
2% stop loss at 5x: 10% loss on your principle.
5% stop loss at 5x: 25% loss on your principle.
Once you decide on how much you are willing to lose on this trade, go ahead and open that stop loss sell.
In our trade example, we would have lost $1,250 on our trade, however protected the remaining $3,750
The goal of trading is not to always win, the goal is to live to see another day.
Step 4: Identifying exit and re-entry using TA:
After a breakout period at some point the market with peak, and then drop a bit and peak again. This is what is called being “in the chop”. I usually exit my position at a high point in the chop, because I’m unable to predict what will happen in the short term.
Sometimes if you made a good profit, its good to just walk away and wait for the next opportunity.
Q&A:
How much does borrowing money for leverage cost?
On Kraken using USD/BTC pair, about the same amount as a credit card. Margin is billed at 0.01% every 4 hours, meaning that it will be roughly 21.9% a year. This is on the total value of the position. So on a $10000 position, you will be paying $2190/year to keep this position open, its expensive, but with BTC currently in price discovery mode (and I think its going to fly to 100k), its worth it.
Why not just open a 5x long and hold forever?
Honestly, that probably is a good, even better strategy as well. I guess there is a lot of uncertainty right now with almost everything in the market, and so I’m just trying to catch it when the price goes gap-up instead of holding a position for a very long period of time, and adjusting my stop-losses to trail the price movement.
I made money (yay), now what?
What I’ve been doing is taking all the profits, and converting them into more BTC, and either pulling it off the exchange (to reduce custody risk, or liquidation risk) or leaving it on so that I can continue to take larger positions while I hold a larger collateral in the account.
Good luck!
I hope this guide helps you on your trading journey. Let me know if you have any feedback in the comments section!
Appendix:
Tools used in this Article:
Kraken: IMO, the most trustworthy exchange with low fees and great fiat rails (for my CAD)
TradingView: The best charting tool out there, hands down.
If you found this article helpful, please consider signing up for these services using one of my referral links!
Other TA patterns I’ve used:
Trend upside breakout:
Lets look at our weekly chart again, shall we? See that major resistance trendline since Dec 2017. It seemed to be a really strong resistance line, with the price bouncing off of it multiple times over the past few years.
This line was really strong resistance, and it tried breaking out against it for 3.5 months before it finally succeeded. There were many takeouts along the way as well, which could have messed you up had you opened positions during the takeouts. This is why its important to confirm a breakout before opening a position. Wait a little while longer, or set a stop loss that is 3-4% HIGHER than your breakout target.
Bottomed out support (AKA BUY THE DIP)
I’m all for buying dips when it comes to things you are bullish on the long term. When using leveraged trading, this is sketchy because you could be trying to catch a falling knife, and if you try to use this strategy you better have your stop losses in place right away.
To buy the dip you can use either major resistances, or a double bottom to try and identify where bottom is, however if there are other market force influencing the price movement, charting goes out the window.