EXMO Business Development Director Maria Stankevich on how to secure your capital in unfavorable market conditions
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Everyone knows that the best and proven way to invest is to buy “low”, sell “high”. By the way, this method is often even more profitable than trading. So, for example, some of the top traders of our exchange recently shared statistics: if they bought bitcoin in 2016 (the year they started trading on EXMO) and kept it until 2021, selling $ 60 thousand each, they would receive 2.5 times more net profit than they have today.
Of course, we are looking at this example in ideal conditions: we already know that Bitcoin has shown large growth since 2016. But what if you, succumbing to persuasion and FOMO (fear of loss of profits), bought bitcoin last week for $ 60 thousand, and the trend reversed, and now you are sadly watching the downward movement? It's very simple: the best way not only not to lose, but also to make money in a falling market is to hedge your purchases with short positions on a margin platform.
What is margin trading? This is borrowing funds from the exchange to conclude a deal. The amount of borrowing itself is called leverage. If it is said that the leverage on the exchange is x10, then this means that for every dollar on the account, you can get 10 dollars. The key advantage of this type of trading is the ability to open short positions, or as they are also called "shorts".
A short position is an opportunity to sell a coin without directly owning it and thereby capitalize on the fall in price while everyone is looking at their negative PNLs. That is, you borrow 1 BTC from the exchange at a price of $ 60,000, sell it, the price goes down, you buy bitcoin for $ 57,000, give the exchange 1 BTC and take $ 3,000 of profit.
Now let's go back to today's market and our example. You bought one bitcoin on the spot market for $ 60,000 based on the growth of the asset. But the market often experiences unforeseen corrections caused by a negative information background. In order to hedge your spot purchase, you go to the margin platform and open a short position of $ 58.5 (support level) for 1 BTC, with a $ 3K deposit and x20 leverage. In this way, you offset the potential loss on the spot with your profit on the short position.
In order not to monitor the market every second in anticipation of a reversal, you place a trailing stop order (a tool that allows you to automatically set a stop loss at the required distance from the market price), which will allow you to exit with a profit if the market reverses. Profit!
As you can see, this scheme allows you to hedge spot purchases in the event of a possible market reversal. Of course, such a scheme also has risks.
- If you do not set a trailing stop, there is a high probability that the market will reverse, the price will go up, and you will, in fact, continue to remain in a hedging position with a zero result;
- It is imperative to remember that borrowed funds do not come for free on the margin platform. The trader must pay the exchange interest for the use of these funds, which can be in the form of opening fees, renewal fees and closing fees;
- You need to keep a close eye on the liquidation price for a short position;
- When the liquidation price is reached, your position will be forcibly closed.