I received a PM asking for some clarification on my trading system. I figured I'd add the reply here, in case others might find it of some interest. First, the question, then the clarification:
Hey!
Sorry to bother you,I'm kind of a trading newbie(just got in the market mid-july) but i'd like to ask a few questions about your trading method.
I've seen that you sell x amount of btc on every 250$ it rises and buy y amount of btc every 250$ it falls.
Could you please explain it further?
How should I set my buy/sell orders?( With 1BTC as the starting amount for example)
As I got it, it looks something like this:
You have 1 BTC, the price is 10 000$.
Once it hits 10250, you sell 0.1BTC for example
You have 0.9 BTC+ 1025$
BTC price falls back to 10 000$, you buy 1025/10000=0.1025
You have 1.025 BTC
But what if you sell 0.1 every 250$, price is at 12500$ and you are all in fiat, out of BTC?
If BTC would have a bull run above 12,5k, i'd be sitting on the sidelines all in fiat. Is the solution to this is that you keep using your profits to buy/sell at a higher price scale?
I'd love to hear your opinion or technic on this!
Thanks,
Hi -
You've got the basics. However, you correctly have detected a risk in such trading. If your trades at each increment are a significant percentage of your total holdings, then you risk running out of Bitcoin before the price rises very high. You will run out of Bitcoin when the Bitcoin price is (interval * 1/percentage) + price_at_start.
The solution, of course, is to make your trade at each interval a smaller percentage of your overall holdings.For example, if you start today to trade one-onethousandth (0.1%) of your base at each interval, you won't run out of Bitcoin until the Bitcoin price is ($250 * 1/0.1%)+~$12000 = ~$262,000.00 per Bitcoin*.
If we ever get that high (I would not be particularly surprised), you'll be selling your last tenth-Bitcoin for $26,200. Not too bad.
*Actually, if you take your profits on the Bitcoin side rather than the $ side, this is a worst-case scenario. The volatility between today and the time we hit $250,000 will result in additional profit in the form of additional Bitcoin. This will extend the upper range at which you will run out of Bitcoin. Will it extend it to $300,000? $500,000? $1M? Interminably? No way of knowing in advance. But safe to assume it will extend it somewhat.
I suggest running out a bunch of scenarios in Excel, playing around with interval, percentage, and volatility profit, and map out a scenario with which you feel comfortable.
I'm not sure whether or not this is the 'best' trading strategy. However, it removes the need to be prescient in where the market is going. As long as the overall direction of the market is up, it will return consistent profits. It can also generate profits in down markets (that's when you build your Bitcoin holdings). It also maximizes return on market volatility. And the Bitcoin market is famously volatile. Most importantly, it is automatic. It removes the mistakes you might make due to overexuberance or panic.
It may be worth mentioning that I leave many open orders on both the buy side and the sell side. This has two benefits:
1) It ensures that quick market moves will not outrun my ability to enter new orders.
2) It reduces my trading costs.
To explain 2) further, exchanges charge a fee for trading - that's how they profit and are able to stay in business. Different exchanges have different pricing structures. Each exchange allocates fees to each side of the trade. This can be allocated to the buyer and seller roles, or it can be allocated to the maker and taker roles. I do this trading at an exchange that charges only the taker side of the deal. Limit orders (the type of orders I enter) are the 'maker' role, so there is no fee for this trade.
Of course, leaving open orders on the exchange requires you having value locked up on the exchange. Many exchanges 'have been hacked' (sometimes probably a synonym for 'owners ran away with everybody's money'), leaving their customers Bitcoin-less. This counterparty risk is something you need to be comfortable with.
Of all the exchanges available to Americans, I trust GDAX the most as far as counterparty risk. Further, their price structure is 'free to maker'. For these two reasons, GDAX is where I do this trading. YMMV.
