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.

Try to look at it another way:

You are long 10 BTC. You short sell 1.

BTC goes down. You close the short and 10% of your virtual losses on the long are recovered.

Then, EITHER

- BTC goes back up. When it gets back where you started, you still have the (real) profit made on the short.

OR

- BTC goes down some more. You're losing, but you're losing somewhat less. You have more margin - whether you want to risk some more, or you're just glad your liquidation is that little bit further away.

That's how I have used my contrarian positions until today, and I am glad I did.

So your reasoning is the following.
You are long 10 BTC.  You short sell 1.

1)If BTC goes up, you are happy, because you lost on the short bitcoin, but actually you gained.
2) If BTC goes down, you are sad, but at least you can buy back your bitcoin, profit from it and alleviate your suffering.

THe reality is.
a)You are long 10 BTC.
b)You decide to sell 1 bitcoin.
c)You are long 9 bitcoin and some cash.
If BTC goes up, you are happy, because you gained. on those 9 bitcoin. Cash is the same.
If BTC goes down, you are sad, because you are losing on those 9 bitcoin. Then you decide to buy another bitcoin and you are long 10 bitcoin and some (less) cash. You are in a very similar position than point c. but with less cash to spend on more bitcoin buying.

If you are trading with linear assets there's no other other way to sum all of your positions and think about only as a SUM. the worst think yopu can think is where you bought some corn and you have to sell it above that level to gain.

I strongly disagree with d_eddie.
Even in highly volatile environment Mark To market is the best way to think of your trading position, because MtM has to do with the current price, so it has to do with the future movements.
If you think on yor P&L, you think where you traded the corn in the Past. Very dangerous.
When you trade you have to think only where you are headed to, not where you have been: is't like driving looking into the rearview mirror to decide where the road is headed....



This is actually 100% rational. HODLing is the best strategy to gain from Bitcoin!

EDIT: I just realised I replied to JJG. I don't know if I am ready for a wall of text!

No, this is incorrect.  You have to remember a lot of these traders only care about growing their $USD position for their company or shareholders or whatever.  So if you hedge a range and lose 10% while gaining 50%, then you had a significant increase to your USD position.  In their mind, better to be mostly right & a little wrong rather than completely right or wrong.

Also, there are options vessels with call/put premiums that can further mitigate the risk of a particular position.  Not everyone just buys and hodl's. 

Funny enough though, I'm one that has gone from "day trading" all this to large multi month swings / simply hodling (due to time constraints).  So I only recommend these strategies for people who have a lot of time to manage the entries and exits.

No need to be humble, since you probably know better than I.

In support of my stance:

- Mark to Market is a worse metric when the asset has strong volatility or is subject to the whim of sentiment. Which is the case for bitcoin.

- I let my long live because she will get back up there eventually! This might not be 100% rational, all right 

Of course, I don't short bitcoin, but I do sell small amounts of BTC on the way up.   It seems to me that shorting can be employed merely to amplify the system that I already employ; however, such amplification is not so great as to overwhelm the longs including either not using stops, or putting the stops out so far as to have less chances of being manipulated out of the position.

Accordingly, the longs might be something like 10 bitcoin, but the shorts would be less than 2 bitcoins and perhaps even frequently less than 1 bitcoin.  In other words, the shorts are just a small fraction of the longs, and end up providing a kind of insurance against the longs, even while, overall, it would be more profitable for the BTC price to go up, rather than down.   

So, because of dickering around with shorts, there is NOT as much profits from when BTC's price finally does go up, but at the same time, profits are made when BTC's price goes down in a much greater way than merely selling a few BTC on the way up and buying back at lower prices.

You are right, well, it is a system that can be safe if it is perfected with the experience, every time it is successful in trade it is because another lost the trade that he did, it is like trading with the money of others, since Everything is valid from the point of view of market speculation.

Believe me I know how it works and having long and short positions doesn't help you with this, as the only way at looking it is doing all the sums and think like you have only one position.

Only way to decide to keep open a position is current Mark to Market, not inception or initial trade level.
 So I humbly disagree on this specific approach.

It's just a way to manage consolidation areas and then play the breakout.  Most of these guys trade with leverage.  So a break out can result in a 10X return for a little risk.  Again, I don't do it but I understand how it works and what the draw is. 

This system can and does pay off. A couple ways it can:

- No need to close both positions at the same time! You could taper the losing one or close it abruptly if you're sure of the trend.

- Different size/different leverage for the two positions.

EDIT As an actual example, I have a long position still suffering. Alive, but not kicking. I opened a short and scalped it down, cashing out little bits and refreshing the short when the price bounced up. So my losses on the long are mitigated. In this case the short is smaller than the long, but it hasn't been like this every time.

Indeed that strategy has no meaning.
If I buy a bitcoin and then I short a bitcoin I am flat.
If I buy a bitcoin and then I short 2 bitcoin I am short 1 bitcoin (so why getting long a bitcoin in the first place?)
If I buy a bitcoin and then I shott  10 bitcoin I am short 9 bitcoin.... (again..)

This reasoning could be very different if there were options available to trade. But this is not the case.
I dismiss that video as bullshit.

Some small fish also do this.

Indeed.

I'm no expert either, but the system does pay off with a little caution.

Have my last merit!

it do not make sense to me. if I buy I expect the price to increase and if I short with leverage I expect the price to decrease.

if I buy one BTC and the same time I short BTC with leverage then if the price will increase my short will get liquidated soon depending on my leverage. if the price decreases my short will get in profit but then it was useless to buy BTC because better buy after the short was closed in profit.

It's common for larger positioned traders to "hedge" their bets with longs and shorts both open simultaneously with stops in place so they catch the dominant trend move.  The problem is whales know this and tend to play games with significant low time frame horizontal support/resis lines.  You'll see explosive moves up or down that end up retracing (like the well known "barts").  These moves end up hitting the stops of both longs/shorts before actually trending up or down.  Options are to set stops much further away, but the potential loss is greater also.  I'm not a huge fan of the system but then I'm no expert.

Don't take these "high leverage lambo soon" trading videos seriously. What they really profit from is ad revenue and "online tutoring". Its basically just a scam for the gullible. Unless he does actual live trading, no prerecorded bullshit, don't believe it.

Hey guys, have you ever done some trading on both sides? That is, if you enter Long, do you protect your position in Short with some leverage? This Spanish-speaking Trader did it, the video is from 2018, but it seems to me that the adrenaline he feels is a lot! more when you do it with 100k!


Source: https://www.youtube.com/watch?v=T7p5UTPNPIs&t=14s


As Jesse Livermore did, it is a way to always be in the market, no matter which direction you are going.

Do you think it is convenient to do it right now in the market? Since the price is expected to increase, but if it falls, protect your position.

Obviously, to do this you have to have a lot of experience and try to suppress emotions to the fullest.