“Buy low, sell high” may seem like a simple enough trading strategy, but in a highly volatile market such as cryptocurrency it is imperative that investors exercise proper risk management such that they don’t experience massive drawdowns whenever a trade goes poorly. In this post we highlight a few basic strategies for entering and exiting trades while properly managing risk. Nothing in this post should be construed as financial advice. We are merely discussing trading strategies. Any assets mentioned in this post are purely for the purpose of example, and should not be interpreted as investment advice from Arctaurus.
Let’s dive in.
Entering a Position
One of the most fundamentally important tools that a trader has at their disposal is the limit order. This may seem obvious, but it is all too common for novice traders to immediately try to enter a position by using a market order, which can result in slippage and higher taker fees. Not only is a market order more expensive to execute, it is also a tool that encourages FOMO. By removing the market order from the repertoire, a trader becomes more forward-thinking and deliberate with their trading strategies.
Before entering a position, it is important to understand the context and conditions of the trade. What is the time frame? What are the current market conditions? A scalp intended to be entered and exited within the same day will have different conditions and requirements than a swing trade with a time horizon of several days or more.
Scalping is enormously difficult to be profitable at over the long-term, and is often only used by experienced traders in small amounts during periods of high volatility. Therefore we will focus on swing trades, or trades that are carried by market momentum and trends over several days or even weeks. These trades require patience, but are more likely to be successful if executed properly.
Executing the entry:
When looking for an entry position, it is important to identify both long-term support levels (for a long) or resistance levels (for a short) as well as any prevailing trends. For the sake of simplicity, we will focus on entering at or near a major support level. For example, let’s look at the following short setup on $ETH:
On this chart we see three major liquidity zones. In the previous 2 weeks, ETH has skyrocketed from the lows around $2500 all the way up to almost $3500. It is at this point that we decide that we want to open a short position with a time frame of roughly 1 week. We want to set a limit order at the base of the liquidity zone, with a stop-loss exit just above the top of the zone (in case ETH keeps chugging along), and a target of the top of the next highest liquidity zone.
The justification for the trade is this: ETH has been powering upwards with roughly zero pullback for almost two weeks, and it has reached its second high timeframe resistance level, and we have a clear invalidation level should ETH continue it’s upward trajectory. Therefore, we can open this short with very low downside. We can see that this trade has a risk/reward ratio of roughly 4 — we are risking just under 2% of our position size with a potential upside of nearly 8%.
Exiting a Position
We’ve defined our entry and stop-loss levels, but how do we take profits? It may be as simple as setting a take-profit order at the target level, but what if the price doesn’t dip that low, and resumes its upward trend? To avoid this, we can set staggered take-profit orders along the way, ensuring we lock in profits as the price dips down. Where you set these orders is up to you, but it is often convenient to set 2–3 take profit orders along the way towards the target such that as each is hit, a portion of the trade is closed and the profit is “locked in”.
If we zoom in, we can see a few significant levels in this range that may be logical take-profit levels. How one determines what % of the position to close at each level is up to the trader, but it could be an even split of 1/3rd + 1/3rd + 1/3rd, or 50%-25%-25%, or any combination that eventually closes the position once the final target is reached.
By staggering your exits you are more likely to lock in profits, and reduce the probability that your target is missed by only a few pips before fully reversing and getting stopped out of your position. Good traders take profit early and often.
The trade in review:
Once the trade is fully closed, it’s important to catalog the details of the trade. Good traders keep a trading journal that details everything that went wrong or right with a trade, so that they can learn from their mistakes and reinforce good strategies over the long run.
With Arctaurus you can automate this process beyond simply setting limit and take-profit orders. For example, you can keep an eye on Twitter key words and trends to prevent an Elon Musk tweet about Dogecoin from stopping out your meticulously planned short. You can also create conditional orders based on simple or complex indicators that allow you to follow trends, ensure that you don’t close your position too early, or otherwise take into account multiple indicators to influence your trading strategies.
If you have any questions, feel free to pop into our Discord server to ask either the community or ArcTaurus team for advice. You can also the rest of our links here, or send us an email at info@arctaurus.com.
Stay tuned for more posts. Until then, happy trading!
