I would like to talk about short orders and short positions and especially through out of derivatives — indefinite future contracts, the main trend in 2019 on crypto market!
Let’s go deep into exchange markets speculation, whales and plankton world, find out the answer there like “what the short is in principle, what is the difference from long, why is it nessecary and finally — people, and what the hell is going on here at all?”
Put in a word about the longs
First, a few words about long orders. When you first come to the market, any market, whether Forex or Crypto, you realize only the simplest thing that could be: buy cheaper-wait-sell more expensive. This literally calls the Long or long position.
Simple example of a long order: bought BTC for $1000, waited a year (well known as HODL), sold for $10 000 (but you did not, right?). Got your X10 or 1000% for that matter, bought a “Lambo” and feel yourself like a Boss.
To open a long does not even have to go to the stock exchange, it is enough to buy in the store something on sale, wait until it is over and someone does not get the goods, and then sell this product at a market price meanwhile without a discount. Of course, it will not be a real long, but the essence of the operation is the same. And we all did so at least once in whole life, so we are very easy to start trading on the stock exchange!
I’m sure it’s all clear without me. But then it is going to be difficult and my help will be quite welcome because, at the time, when I was a rookie, realizing that you can make money on falling, literally made me nuts!
Some people think that to open a short position is to buy assets (currency, shares, crypto etc.), and in a day or even three hours to sell it. That’s not so. Even if the transaction period is one minute — it will be long, only short-termed.
Go shorts
First of all, I want to turn back to the classic understanding of short, which first appeared on the commodity exchanges.
So, imagine that you have an understanding that a particular product will be cheaper. For example, sugar, because sugar cane plantations have collected an unusually large harvest and soon the market will receive a lot of finished products. How to make money on this information? You go to a broker on the stock exchange and ask for a loan of 10,000 tons of cane, which is trading at $5 per ton at the moment. Once the broker has provided you with the desired number of goods, you immediately sell it at the market price, i.e. $5x10000 tons=$50 000 and wait. After a few months collected and processed in the sand sugar cane enters the market, the product becomes too much and manufacturers, competing for the buyer, reduce the price of sugar.
For example, the price becomes $3.8 and you decide to buy granulated sugar at that market price. $3.8x10000 tons=$38 000. After buying the goods, you return to your broker and give him what you borrowed, i.e. 10 000 tons of sugar. Now, you have no product, but you have a profit of $12 000, resulting from the sale of granulated sugar for $50 000 and buying it for $38 000. As a rule, the broker does not provide a loan without a commission, therefore, paying him this commission, for example, $3000, you will receive a net profit on the transaction in the amount of $9000.
The same amount you could get by buying sugar at $3.8 and selling at $4.7 with the growth of the market.
Briefly: “To Short” — means to sell what you do not own, and make money on it!
Crypto shorts or it is not that simple
Going back to the crypto world and consider the short on the usual spot exchange, for example, the popular Binance. There is no broker, and the exchange does not provide loans. Technically speaking, you can’t short BTC if you don’t have the other instruments (altcoins, like ETH or “stablecoins” like USDT). A certain analog of short appears at you only at the time of sale of BTC, but, as you might know, to sell something, you need to buy something first. Whereas the pair for sale will be looks like ETH/BTC or USDT/BTC. In the first case, you will have a certain amount of ETH in your hands, in the second — USDT. However, you can earn on the spot in this way only if the BTC price chart, having dropped to a certain mark, returns at least back, and you, at the same time, have time to buy BTC at a lower price. Otherwise, you will receive a loss and there is no guarantee that you will return your investment in the nearest future.
Example: you purchased 1BTC through the exchange at a price of $10 000, transferred funds to the Binance and immediately sold for USDT, receiving the equivalent of 10 000 USDT. The price goes down and reaches the level of $8000 per 1BTC. You buy BTC per USDT, now you have got 1.25 BTC. But do not hurry to rejoice: further the price goes down and you stay with your 1.25 BTC in anticipation of growth. And there is no growth, at the same time, you do not earn anything. At a price of $5000, you lose your nerves and you sell your BTC again for USDT, receiving $6250 for them, and this is a loss of 37.5%. Of course, we can not buy BTC for $8000, but wait until it reaches, let’s say, $4000, buy it here, get 2.5 BTC and only then going to wait for growth. But, do somebody of you guys know how to catch the “bottom” like this? Where is the guarantee that the rate will not fall to $1000 and even $100?
I hope you understand my idea, well, who did not understand, here it is: to short on the spot exchange you need to have an asset, for example, BTC, available (pre-buy it somewhere) and be either a badass trader, or an incredibly patient “Hodler” with an unwavering faith in Bitcoin. Otherwise, you will lose enough to be disappointed in trading for a long time.
All at once
Finally, we come to the short on a relatively new type of contracts for cryptocurrency exchanges: indefinite futures or swaps. For advanced (and not so) traders this topic is not a new, because it has long been used by the Bitmex exchange. Another thing is that not everyone, even those who trade there, fully understand what they are trading, well, today I will try to reveal all the cards. In the framework of the story of short, of course.
So, as you can see on the example of spot exchange Binance, as such there is no short. There is a substitute and traders rather trade there altcoins, as well as hyped tokens on their own blockchain exchanges, than Bitcoin. In order to have a full-fledged short, the exchanges had to implement a futures contract, but not the traditional one, with expiration dates, but changed, instant and perpetual. I.e. in fact, you are not trading futures at all, but something else. In addition to Bitmex such contracts today offer another 5 exchanges, of those that are available to a wide audience, so I’ll show you a short on the example of the Estonian OnederX.com.
Nowadays the exchange specializes at trading only Bitcoin, but in the future it will be have appeared to add other tools. And they have a Meme trade! What?! The ones you use on forums and in the Telegram. See details on the website of the exchange, and I will continue about the shorts.
Perhaps for many of you it is no secret that the funds you send to the exchange are stored in special wallets, whereas the funds you see on your account are just numbers. Real money you get only at the time of withdrawal. That is why trading instant perpetual futures contracts has become not only possible, but also easy. In fact, to open a short trade, you just need to click on the Sell button. This operation means that you have not sold something (you do not have anything), but bet that the asset, in this case BTC, will go down. Yeah, it’s just a bet, like at the horce races. Your account acts as a security bet (the exact Bitcoins that you have deposited to the exchange). They limit the amount of bets and the price of liquidation.
Due to the ability to play down (“short”), traders have the opportunity to effectively manage their risks, in professional language it is called “hedging”. How it works I will tell you now, and at the end of the article will be a consolidating understanding of the example.
Let’s say we have 3 BTC, which currently cost $10 000.
If we open a position minus 10 000 contracts (i.e. short), the value of our portfolio in dollars will not change:
- when the BTC rate falls, we lose due to the fact that we have bitcoins, but we win BTC on futures due to a negative position
- when the BTC rate grows, we lose BTC on futures because of the negative position, but we win due to the fact that we have bitcoins
In both cases, the win and loss converted to USD will be the same.
Once again, in the case of futures, we simply bet on the rise or fall. If we choose to fall, then open a short position. When the rate goes down, we start earning the difference between the open price and the current price. This difference is paid to us by those who bet on the opposite outcome and did not guess. Everything similar races: wins only one horse and put on other pay the winner.
How is your profit (profit) and loss calculated? To do this, there is a formula PnL (Profits and Losses)
https://cdn-images-1.medium.com/max/1000/0*r5ae3aSUwQMkgZpj
In the trading terminal it looks as follows:
We have opened a short position, which you can find out by looking at the Direction value at the bottom of the terminal.
Next, you can see the Volume of the Position — minus 100 contracts (minus shows that this is a short).
Your leverage automatically formed by the exchange — in the examples it is 18.7 x and 9x.
Volume of position in Bitcoins taking into account the leverage — Total field.
Opening price — 5154.9 USD.
Marking price (marking price is always different from the market price. This price is used by the exchange in order to avoid unfair liquidation of your position due to the manipulation of individual traders).
Liquidation price — when the marking price reaches this value, the position will be forcibly closed by the exchange. There are several ways to influence the liquidation price:
- add some Bitcoins to your trading account (add margin)
- close part of the position (for example, opened a short for 100 contracts at the price of 5154.9 USD, at the level of 5300 USD put a stop order for 50 contracts)
Profit/Loss or PnL — your level of profit (value with a plus sign) or loss (value with a minus sign). Shows the current result for all open orders, if you close all orders at this point, you will receive a profit or loss on the value specified in this field.
Now about how to open a short position on OnederX:
1.The market
Click the Market tab, set the number of contracts, click the Sell button (open short). The order will be opened at the current market price. This is the most profitable way to open an order, because Onederx exchange is the only futures crypto-exchange in the world that provides a positive commission for a trader who opens orders at a market price
2.Limit order
Click the Limit tab, set the number of contracts, the price at which you want to open an order (in our example — 5100 USD), click the Sell button (open short). The order will be opened at the price you specified. This method is suitable for those who want to open a position with a delay (for example, based on a sharp price movement, which is usually difficult to catch at the moment) or vice versa, to close the position at the specified price
AND DO NOT FORGET TO PUT STOP ORDERS!!!
If you have opened a short position, for example, at the price of 5100 USD, the stop should be at a price different from the opening price in the big direction (i.e. above). Why? When you open the shorts, you bet that the price will go down. If the price has gone up, you incur losses. By placing a stop order above the open price, you insure yourself against even greater losses (for example, if the price is 5300, 5400, etc.).
To open a stop order, click Stop, set the number of contracts (you can set as many contracts as you have in an existing order or less, if you want to close only a part), the price of the stop (close) and click Buy (i.e. buy). It is IMPORTANT that the stop order should ALWAYS have the opposite direction from the direction of the original opening order, i.e. if you have opened a short (Sell), then the stop is the opening of a long order (Buy). And vice versa.
If you specify more contracts in the stop order than you had in the already opened order, when the price reaches the stop value, you will have a position in the opposite direction for the difference between the number of contracts in the open order and the number of stop contracts.
Given example:
You have opened a short order for 100 contracts at the price of 5100USD
You have opened a stop order for 120 contracts at the price of 5200USD
The price went up, reached the value of 5200USD, the exchange automatically closed your 100 contracts, but since the stop order indicated 120 contracts, it opened a long position for 20 contracts.
The formula can be expressed as: -100+120=20
Be smart — use every single opportunity
Now that we have dealt with what a short, I will say a few words about why it is necessary. It would seem that it could be easier: bought Bitcoins, transferred to the exchange, waiting for the rate increase, sell. Profit! But if Bitcoin fell down, roughly the same as in the beginning of 2018? To sit and wait for a miracle?
Yeah, if you don’t know about the shorts. But now you know, don’t you? And if Bitcoin goes down, you do not go to the spot exchange — you go to the https://trade.onederx.com/exchange/BTCUSD_Pexchange (or similar) and bet on the fall. Got money on the fall? High five! Now put on growth and earn more! And buy yourself a “Lambo” you lucky (but smart) bastard! And you can insure your open position on the spot exchange at the expense of a position on the exchange, where a futures contract is available, and for an amount several times smaller, due to leverage.
For example, buying 1BTC you transfer 0.9 BTC to a spot exchange planning long, and 0.1 BTC you transfer to an exchange with the ability to open short positions and, using X10 leverage, open a short position on the same amount of 1BTC. Thus you insure your funds against losses.
Fluctuations in prices on the stock exchanges depend on many factors and not the last role is played by human psychology (greed, fear — the main factors). And if you want to make money on the stock exchange, in your arsenal must be an understanding of the fact that you can earn not only on growth but also on the fall. Shortly — short it, but do not forget about the stop-loses!