Hello everyone. This is MrJozza here.
Before we start, this video was
funded by tips from Roberto and Hawkeye with them dedicated to Bitcoin Melbourne
Now, since Bitcoin traders seem to be some
of the worst for risk management I’ve ever seen.
It’s time to take a look at How not to lose it all while trading Bitcoin.
Now, the biggest risks to your account balance are as follows:
Bitcoin price surges and stop loss management
Exchange risk and the counterparty risk associated with it.
and most importantly, trader exuberance and over-confidence.
I’ll do these in sections and put timestamps in the description below so you can jump to each
section as desired or watch all of them
if you love your money or just my accent
Price surges are relatively straightforward in erasing a lot of your risk
to the initial trade opening. Learn how to use and take advantage of stop losses.
‘But MrJozza, what level do you set our stops to?’
Well, that depends on the market. If carefully used you can not only use a stop loss to control risk
but also to accumulate in a position and to hold winning positions longer.
Firstly, you’re looking to mitigate risk. Say, the market has began trending. Bull or bear
doesn’t really matter
Ideally, you have spotted a breakout of a resistance level. In this case,
you will want to
place a stop loss below your position of 1-3% of the price and sit on your hands.
This is stop loss use at the most basic level. But what if you have a favourable position but wish to step out
or not spend valuable time babysitting it? The ideal when trading is
to make your trade zero-risk and break-even the trade as soon as possible.
Its an important psychological level that will take a good part of the mental strain away from a trade.
For example, lets use Bitfinex. Lets say you opened a long position trade on spot by
allowing the market to fill your bid order. This means you paid approx
0.1% fee. To break even on the trade, you must be at least 0.2% ahead on the trade from the price you opened
from the price you opened, if you sell the long position by placing it on the ask side;
paying the 0.1% fee twice. However, in this case, you will be using an exchange stoploss so
it will be 0.2% fee when you sell. Since these percentages and prices
will be different let’s just use the
higher number for the sake of simplicity. This will be
This will be the second position of your stop loss. Now the trade is trending, much like that $410
to $470 run up we’ve recently had. This might be several day or even weeks
but I promise you, that you will need to sleep at some point or another.
The last type of stop loss we will use is marked using support levels.
As we can see here, the market trended upwards with no significant retracement before the top.
This allowed me to easily target support areas to place my stop-loss position.
The theory doesn’t much change when it’s a choppy rise either. After each blow off, there will be an area to see where
it found itself temporarily over-sold off. This is when we see
traders so-called ‘buying every dip’. You can use this as stop-loss points for your long
position so that new lows from that point would kick you out of your long in a profit. There is
an obvious and major issue with this strategy; it is predictable. Assuming everyone uses
this same method of placement, an ambitious whale may market sell through this
with large bids directly below so that your stop loss will fill their bids. Your experience
will vary. Try to look back at historical price support or try to place your stop loss at round
number support. A look at the orderbook is very revealing on where the
volumetric support is but be wary of hidden orders. Paid premium support so that your
trade is not visible on the orderbook.
The common alternative is a standard exchange
trailing stop. Depending on your exchange this will be something along the lines of the following
Assuming the price makes a new high, it will set your stop loss automatically to this new high, minus the price you entered here.
So $500 would be $490 with a $10 trailing stop. You don’t see these used every often as a
lot of people have no idea how to use them; greed will have you set this number too low
and get chopped out on the smallest retrace.
Too high and you will miss the top by a country mile. It’s best used with supporting analysis
regarding trend volatility or when you have a big price breakout candle on preportionally thin purchase volume.
These are the most likely to significantly retrace. Personally, I use my
own self-coded indicator set to find me a stop loss but this isn’t available for public use yet
so will not be shown. Maybe in another video but for now, my positions are all public
on my twitter, good and bad.
I digress, now that we have talked about
market movement; lets talk about how novice traders usually lose their account balance.
Leverage, also known as Margin. There is a gambler in all of us; it’s the human experience that looks for opportunity
and it sure is difficult to resist that siren call that whispers sweet nothings
of big profits in our ear. I’m looking at you high-leverage traders.
Levity aside, margin has several important functions in trading. It allows:
Ability to take out a short term loan for the purposes of a long or short position, using your account
balance as collateral. Trading using a larger balance while
mitigating the counterparty risk of leaving all of your bitcoin holdings on an exchange and
Mostly in the Bitcoin space, using return swaps to earn interest on an invested or long term position.
Lets say you open a short position (that is taking a loan to sell Bitcoin then hoping the
price drops so you can buy them back cheaper, and pocket most of the delta price. But what happens if you go
full FOMO, open a position using all the collateral in your account, then the position goes over your head.
The margin call on this type of position can be calculated using the following equation:
(The price that you went crazy minus fees X initial margin requirement)
/maintenance margin. For Bitfinex this would be (Price*0.7)/0.85.
The initial margin requirement is how much of leverage the site will allow you, miantenance margin is at what
level the position will be liquidated as a margin call unless you have extra collateral added to your account. Be aware
that this equation does not account for fees but these are not a constant, return swap current
rates are available on the website under the return swap tab.
So you see, a margin
long differs from a spot long in this way. In layman’s terms; you buy 10 btc on spot, you
will always own those 10 BTC no matter
what the price drops to but buying them on margin
will hold you to the rules stated above. You will need to carefully manage your upside reward
against the downside risk. Also known as the risk/reward ratio.
Now, hopefully you don’t lose your head
and hold a loser down to margin call but
Bitcoin is littered with the bodies of traders, in fact this is so common that
regulars of Bitcoin has said; you’re not a trader until you blow your first account.
But do you really want to be this guy? Those added to the list. So lets hope
that you use the margin function responsibly and not as a novel method to spin your account balance on a tax-deductible roulette wheel.
This one is pretty unique to cryptocurrency but worth accounting for with
How many cryptocurrency exchanges can you name that
have closed down from lack of engagement, seized by government, hacked, illiquid or plain
just scumbag owners who decided your money is better in their hands?
Well I bet you are running out of fingers to count on. A whole micro-economy has popped up
with vaults for your Bitcoins opposed to the Bitcoin core client. The alternative
was just keeping everything on an
exchange you can see why that is
foolhardy. Making a paperwallet on a clean computer then formatting
it will cover a very secure cold storage and an encrypted wallet with several backups
on external storage will cover your quote-unquote bank
away from the exchange. There are also companies which provide
alternatives you can pay for to secure your Bitcoins but I don’t use these so I won’t shill them.
As for counterparty risk;
as mentioned in the margin section, one
method and my personal favourite is to use the margin feature
to only risk a fraction of your funding reserve. For example
lets say you used 3x leverage, the stop loss for a trade can be fairly liberal and
the margin call is rather far off but this does allow you to trade with 33% of
your trading capital while 66% is in cold storage.
but retaining the same purchasing power
The same could be said about the legacy banking system. You store your value in money which is deposited in the bank.
They will give you interest on this for allowing them to use the funds for their own credit purposes and you can use their network to avoid having to carry around thousands of dollars.
However, there is a counterparty risk to this. The bank could default, there could be
bail-ins by government, inflation of the currency and so forth. Extreme examples, sure but you can see why
it does pay to manage the risk of your value instead of putting all your eggs in one basket. Diversified investing doesn’t start at the stock exchange.
A trader buys $10,000 of Bitcoin in August 2013, the price increases 1200% in the next 4 months.
The trader has now made their yearly salary, or even several times this.
Psychologically, you are compromised. Chances are, that you will be cheering
on the price with every new high and screaming to buy every dip.
And that is how people lost millions in the year long bear trend to less than $200.
It really says a lot when the suicide hotline is pinned to the top of leading Bitcoin forums.
As of making this video, I’ve been on a short term winning streak but I also attempted to short the price spike to
$500 in November 2015. Nobody is infallible, I certainly am not and that is why I don’t use double digit leverage.
Like I said before, the more experienced traders will talk about a completely burned account like it’s a regular thing.
Bitcoin trading is not a game, it’s real money and there are some very smart people looking to take your money and add it to their own.
Then they decide to turn it up a notch and use bots to move the orderbook and seemingly try to kill every position you take.
Remember, the trend is your friend. So unless you are highly skilled
with managing your risk, do not attempt to scalp (or take positions based onBut the full quote is ‘The trend is our friend, until the end when it bends.’
Master your stop losses and most of your trades will at least break-even
Killing losers quickly while allowing gaining trades to continue can allow you to still make money, even if your trading positions are
40 percent correct at best.
After that, with good technical, fundamental and sentiment analysis, if your winning trades ratio is higher; that’s just more profit for you.
Or go all-in, on margin, with your whole account. But don’t cry when the transfer of wealth away from you occur
Thank you for watching and cheers.