Topic: Hedge your position right from the start - ongoing discussion (Read 366 times)

Mathematically you guys could be right, you are working on finding the optimum place where you can profit no matter which direction bitcoin goes, I am certain it would be very difficult to find such a spot but it could be totally possible so I can't say it is impossible, you can do it or at the worst you will have less of a loss when it moves one direction because you are hedged towards both sides so you don't gain too much but you don't lose too much neither.

However, this is a method that can be done by very few people, just like many smart people you guys are forgetting that there are people like me who see this as magic or foreign language and not understand one bit which is why it would never get too much mass attention from people, only other smart people like you.

which approach? (a) or (b)? 

so now I have two positions (long and short) opened and there is a soft bullish momentum. what should I do? the long position is in profit and the short position is in loss. should I wait until the price goes to the resistance of the range (high at $8471.6) and then close the long positions in profit and hope we will have no break-out above the resistance? maybe then the price will go down again and I have to wait until the short position is at least in break-even (+/- 0 points) to close it too. this is called range trading and works very well in a defined range but woe there is a break-out with massive momentum - then it will get ugly!

the conclusion for me about this trading style is: at the start you don't have to decide about the trading direction (long or short) when you do open the positions but this means not it is easy money because you will get later at the point where you must make a decision about to close the long position or not at the resistance point (high at $8471.6) to finish later with a profit.

^^ This seems a different system, in that the result is only one position - either long or short, depending on the side of the breakout (high or low respectively). Or am I misunderstanding?

Liking this duet
I'm digging through oldish posts
digesting takes time


You're right fillippone, hence the worry (not without the occasional "fun", I must admit). 100x leverage doesn't make my capital "infinite" unless my position is under 1/100 of my play stash (and even then, nonlinearities and verlakkerijen ensue if said stash is within 2-3 orders of magnitude of the exchange's actual open interest). Nothing will make my time infinite (well, maybe a team in the goossens sense - but then, infinte team turnover becomes a necessity and we don't want to go there, do we). Both "stashes" are finite indeed - and both have hard upper bounds of sorts.

So I see your point, but you must admit my view has merit too.

You earlier said which is the "best" (only, actually) way of thinking.

It might be the worse way in certain cases, but in my own case it made me real BTC. So where's the catch? Me not considering the positions as summable? If it's that, it's a powerful tool!

Your view is the best under certain assumptions: same instrument, closed at the same time, linear. Under others, (mainly: different time span) it isn't. Which doesn't imply the second view is better. It does become strictly better if you have infinite capital and time, and infinitely better if you also have perfect forward information. The option of removing dough from the table is a big help too, as it allows me to chicken out whenever I fancy. Agreed, it's a derivative play involving manual labor.

Summing up, my numbers say that even with finite resources, the "second" system can be put to work. And I'm pretty sure my own set of rules is not the only one that can produce statistical profit in waters such as those we are sailing atm. Maybe someone is able to formalize this in an orthodox way, or to make more sense somehow. You? Hairy? Marcus? V8? Any others?


#haiku

Sorry, I don't undertand your example.

first of all, if bitcoin quotes like you stated:

If we had infinite capital, infinite time we would all be rich.
Capital is finite and time is finite. I don't know if it is better this way, but it surely so much more funny.

We make different assumptions.

Yes, assuming both legs are closed at the same time (constraint that doesn't apply to me).


@fillippone, as usual your posts are instructive, thought-provoking or both. (That's how you amassed that disgusting mountain of merits in no time.) Even if in an amusing way, I was making a point. It took me a bit to digest your input and articulate a reply, so here I'm back.

When I said that unrealized P&L is, well, unreal, I failed to add "until you hit the wall": the wall of nonlinearity at liquidation. If you manage to avoid that wall, you statistically win the game.

I don't have formal training in economy or finance, but the mathematical advantage of playing both sides can be seen by integrating P&L over time along random walks with reasonable properties.  (Perfect absence of memory in the Markov chain sense is not even required. More something like ergodicity in the sense "the graph will eventually get back here, for sure!")


You assume P&L is instantly real, since current price is the best possible estimate of future price. Which it could be if there were a universal way to price risk and opportunity cost. Which I assume there isn't.

My own assumptions? "I'll never hit that wall because I keep my gameplay far from the sidelines." Taken to extremes: if I had infinite capital, I would not worry a bit. In other words: my bankroll is finite so I do worry of course, but I have low (negative?) opportunity cost for my play stash - it's better for me to use it to get moar btc at good odds than to collect dust in the freezer. As for the risk, I can't quantify it precisely, but it's bounded by the play stash amount if I stick to my rules.


Play money has an exclusive set of rules, such as "move excess play money to the cold stash when the amount reaches X", or every 2 months, or some combination that works for me. Another way to see it is: never let fiat enter the equation. Fiat for me is only relevant when I need it, and it comes from the main stash anyway. Once you've put away excess totaling 100% of your play stash, you're playing with house money. Once it's 200%, your risk still doesn't go to 0 (ergodicity hits both ways), but you have one "free" round where you can be wrong about never hitting the wall and still remain in overall profit.


I subscribe to your point about options. Most of my games are played with futures or swaps. Swaps are nice for the short side, since in a bull market they usually collect funding interest. I would love to have options available too! They would lower the cost of "insurance" a lot, if settled in kind. At the moment, options involve fiat unless I jump through hoops, so I do the best I can without them.

Numerical disclosure of sorts. Over the last week, I just gained 1% of the play stash with my short position by repeatedly closing it in small profit and reopening it higher. Last trade was 0.2% profit, new entry point just 10$ higher and 8% larger. Present short leg size a little over half the long (which is losing ~8% atm). A few more weeks like this and I will get even. If it goes down, I'm 8% better placed to profit again, while the margin buffer for the long has grown a tiny bit. My liquidation is well below 4k, and if I close the ultra-winning short before that happens, I'll gain about $500-$600 more breathing space, pushing it below 3.5k.

Yes, it is a bit of work actually. So what? A nice little hobby that pays out - an additional way to grow my HODLstash without forgoing, for example, a fancy restaurant or some other cozy reward. And I get to discuss it with some fine gentlemen too, which is a pleasure in itself.

Sorry this was a long post, and terribly OT at that - almost as if this discussion was about bitcoin!

Hedge at the start - Trading System

let's play it simple without leverage just 1 BTC positions in USD.

bid price is 8200
ask price is 8250
spread is 50

you sell (sl -250) at 8250 - from start it equals to -50 in profit
you buy (sl -250) at 8200 - from start it equals to -50 in profit

price goes to 8400 - sell liquidated with -250 profit - buy with +150 in profit
price must go to 8500 to be break-even (w/o fees for both positions)

or

price goes to 8000 - buy liquidated with -250 profit - sell with +150 in profit
price must go to 7900 to be break-even (w/o fees for both positions)

it's kind of break-out system with a range of 500 600 (w/o fees for both positions). there MUST be a range break-out > 300 to be profitable and ranging withing the range will increase the losses every time a sl is hit.

*correct me please if I did a calculation error

EDIT: in my eyes it's a poor system. better you have a range defined and buy above the range and sell below the range because then you will not add several losses if there is no break-out of the range for a specific time.

Very funny.
Merited.

I see now. If you count unrealized P&L as real, then it's just as you say. I still think it's called UNreal - ized for a reason.

The only think that is important is that you are long 9 BTC.
That's it, you can look as 10-1 11-2 100-91 or whatever.
 
All the profits and all the losses are real, it doesn't matter if they are realised or unrealised, they are real.
If you bought ATH in Dec 2018, your losses are real, even if you are still hodling.

It seems that your elaboration is largely correct, yet it should be considered that BTC prices tend to go up and down a quite a bit, but largely UP in the longer run.   So in that regard, it might just be better to merely buy and hold, but if you feel more comfortable employing some downward risk strategies, then you can be better off, and even have more bitcoin when the price does finally go up.  Of course, you have more bitcoin and less cash, but the value of your bitcoin is higher, so ultimately it still seems to me that your overall portfolio is stronger if you attempt to prepare your portfolio for either price direction - while presuming that in the longer run, BTC prices are going up (even if it takes 5 years or longer to accomplish such UP based on peaks and troughs that we are used to experiencing in bitcoin).



Hopefully, higher is the case with bitcoin, and surely we are investing in a risky and pioneering asset, so maybe part of the contribution to the space is appreciating that BTC might not go up, and in that sense, you end up losing money on your investment, even though you had invested in something that you had believed to have a positive future price potential.



I don't recall talking or reading about mark to market in this thread, so it might be a conceptualization that is lacking in this thread.   Surely, I am open to whether it applies to what we are doing, or whether we might be helped by further discussing it.  I think that whatever d_eddie has been doing has been profitable for him, and will likely continue to be profitable, whether it fits with some other kind of accounting theory or not.



I have my doubts regarding HODLing being the "best" strategy, even though it seems to be the easiest.  One of the most inevitable dynamics of bitcoin is that it ongoingly experiences decently large sizes of volatility.  So, engaging in various trading practices could cause both volatility insurance and an ability to profit from something that is nearly inevitable.  Of course, life might be less stressful and it might take less work to merely buy BTC and HODL BTC, and even if a large number of folks are likely to lose money and time from their trading efforts, there can still be more solid systems (and perhaps d_eddie has found one) that allows for greater returns (even accounting for fees and time spent) from employing such system rather than merely buying and holding.



Edit also:
You better be ready for another matter that has shown to be nearly inevitable.   

Agreed it sounds like overtrading to me. 

It is a great point of view, in fact I placed that analysis because I see that it is a way to protect a LONG, in fact, the best is Hold, but if the market moves against our Long, we could not lose, and even get some gain with a Short ... in fact, that technique is from a speculator from the 1800-1900s, Jesse Livermore.