Trading: No Leverage, Stop loss or Take Profit

Technical Breakdown

Dear Traders,

Today is the 22th December 2020, In this newsletter, I wanted to talk about my personal methods of trading a little more, as it seems a few people were interested in how I trade without using Leverage, SL, or TP. I didn’t think it would be a very interesting topic to discuss. but I guess it is a little out of the ordinary for a lot of traders who are used to trading with leverage and stop loss on exchanges.

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Using Leverage

Every trader that has ever traded has likely used leverage to try and gain an advantage or just increase the amount of capital they have at their disposal. Leverage is one of those things that every trader has to use and learn their lessons with, leverage is one of those things that are just apart of every trader’s lifecycle. Now as previously mentioned, the thought of being able to use leverage to extend profits and build your account quicker is what everyone thinks and is the end-goal. But as most of us are aware, that is not how the story goes for 95% of traders. Leverage in 2020 is nothing more than a tool that benefits less than 5% of traders, most of the time is it in the benefit of the exchanges and whales to be able to profit from your liquidation price. As soon as you place a leveraged trade, your liquidation price becomes someone else target, its very a very dangerous game to play, and most of the time.

I used leveraged for my first year of trading crypto and it wasn’t horrendous, but there were some aspects that I just did not enjoy. One of the major things I think most people are aware of by now, is liquidation wicks, mainly on an exchange that allow for use of extremely high leverage, such as bybit and bitmex. How many times have you been in a fairly safe position in terms of liquidation price and then in the span of 5 minutes there has been some insane wick down 10% and it has perfectly tapped YOUR liquidation price. It’s honestly just bullshit and happens extremely often if you're using over 15x leverage. That said, most solid traders usually use around 3-5x leverage…

Lower leverage is always a good start if you're really wanting to use leverage, and honestly the max I would use now if I was forced to take a leverage position would be 3. That said, there are also some other downsides that even using low leverage can have on your trading setups. For example, even just having leverage active on a position can be pretty limiting in terms of position flexibility and emotional strain. Having any leverage active on a trader technically means that you have to set a stop-loss, without a SL your position can become extremely emotional and it sorta becomes gambling and not trading, A SL then limits how much room you have to play with, and honestly just restricts freedom to make more rational choices in my own personal opinion. I personally really like to be able to manually trade my position close it early if needed, add more on a large wick to the downside and just generally not worry about my orders being targeted from the order book. As mentioned using leverage for a small amount of traders is perfectly fine, considering you are sticking to the exact same rules every single time, and you know how to perfectly manage risk/reward and define risk.

Defining Risk

When using leverage, it’s not just as simple as using leverage and getting more profits or more losses. The fact you are using leverage means that to be a profitable trader there are so many other elements of trading that you need to perfect before being able to pull of successful trades. Defining risk to reward setups, knowing how to perfectly calculate the most efficient entry, stop loss, and take profit and just generally knowing the exact setup of your position.

Quantifiably, risk is usually assessed by considering historical behaviors and outcomes. In finance, standard deviation is a common metric associated with risk. Standard deviation provides a measure of the volatility of asset prices in comparison to their historical averages in a given time frame.

I personally like to be able to be super flexible with my positions, that’s why trading spot works so well for me, I like to be able to go deep underwater in my position and be able to continue to add to my position without having to worry about liquidation, fees, funding, I also don’t like to be forced to add to my position to prevent myself from being liquidated if I know a key level is likely to be tapped. Even though this is much easier with low leverage (3x) for me personally, spot is just a lot more relaxing, and for me, this reflects hugely onto my emotions, mindset which heavily affects my trading results. I define my risk in my head, I do not put my criteria in the exchange and I manually trade in and out of my position knowing exactly what levels I want to target or cut my position. I used to use trading alerts last year to manage a position but now I am full time in crypto, this is done literally but watching the charts consistently and just having PA always flowing on my devices. This works for me, and I know SL and TP are perfect tools for a majority of traders.

Take Profit & Stop Loss

I cannot really remember when I stopped using both of these tools on exchanges but it probably was heavily impacted when we saw the fall of Bitmex. Stop losses just are no good for me, especially as its mainly a spot position, stop losses just like liquidation prices can easily be wicked and reversed in the blink of an eye, and if your not able to adjust your position within a short period of time then you're stopped out just before price reverses. I have seen a huge growth in terms of profits by manually watching a position, ignoring wicks, and literally just focusing on pure price action and candlestick closure. It is so refreshing to be able to ignore large wicks, concentrate on pure price action and notice when wicks are being manipulated, and being able to execute positively in that situation instead of getting stopped out. Take profits are sort of similar but of course not so critical to success, I just personally like being able to close my position and scale-out of my position over time manually.

How I usually Exit a Position

So this year, a huge part of my trading setups has of course been based around S/R flips and just critical key levels for price action. I have been pretty much consistently using this logic (shown below) to exit all my positions in 2020. I have explained the logic behind a S/R flip before so I will not go heavily into it at the moment, but the idea behind it is that you keep track of key levels within your designated timeframe and then enter or close based on how price reacts to that certain level. For example, if that level that was previously supported is now being tested from below, if it shows signs of being resistance this is where I would exit out of my spot position, and vice versa.

It’s a super simple setup that just works so well when just using straight price action, trading with spot, and this pretty simple logic has been so much more profitable for me over the past year. Usually finding an entry is done via just finding key macro support levels and averaging into a position over time, but of course, an entry can be taken if resistance is flip back into support. Of course, there are a lot of different ways to enter a trade but mainly I use S/R setups to find exits for positions.

Social Arb Trading

This year has been a pretty amazing year for new projects, project sales, project listings, and other hugely profitable events. This year I have dedicated a lot of my time to learning more about social arb trading and how it can be used to gain a massive edge over the market and find great entry prices on long-term trades. I might write a full newsletter on this in the future if people are interested, but technically speaking social arb trading, is trading based on social indicators such as social media, google trends, on-chain data analytics, and other metrics.

Using simple sites such as google trends can be a very easy indicator of finding positions or projects that are heavily undervalued, you can then tie this into on-chain analytics and fundamental research and find some pretty amazing high timeframe, longterm setups. Easily could contribute 400/500% of my gains this year to literally just trading from social arbitrage. Especially when it comes to trading both BTC and ETH, using on-chain analytics to find out how the tokens are flowing on and off exchanges has been insanely helpful for knowing when to find local market tops and undervalued entries. Usually looking at, % of address that is requesting withdrawals and % of BTC being stored on X exchange. A heavy influx of BTC usually signals market tops and sells incoming while heavy efflux usually indicates large amounts of long-term buyers.

There is just so much to talk about on this topic, I just wanted to share that this is another one of the methods I am actively using at the moment to keep an eye on my long term positions and also find super undervalued projects for short-term trades.

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Thanks, Cactus