At the very beginning of June, I published the first part of the article and subsequently completely forgot about it) But in essence, everything that I do after June 20 and which I mentioned more than once in July is a description of what to do if the price went up, and you were short, or down, and you were bullish.
One day I came across an English-language article on Twitter that cited statistics from several brokers that approximately a third of all small traders and about 80-90% of large players in the stock and forex markets do not use stops. I think the statistics are the same in crypto, plus or minus.
Of course, the big guy already knows what to do, and it’s hard to imagine a fictitious Buffett who bought shares at $100 and followed the stop at $90-95, which he hid behind the nearest lay. But many novice retail speculators (of which I include myself) either use moose, or simply hope that the price will come back someday, without doing anything else.
As I said in the first part, a trader has two best friends. One of them is risk management, a position is acquired in small parts of the deposit, leverage is used in exceptional cases, if possible, multidirectional positions are opened (we short some assets, take some long), ideally have 70-80% of the deposit for medium-long term, and 20-30% for short-term speculation, which at the same time can insure each other. For example, for the long term we are currently taking long positions, and in the short term we are simultaneously shorting something suitable.
Well, a trader’s second best friend is, of course, a hedge. Of course, all people are different, but for me personally it’s not comfortable to use feet, although I often do it. But I consider this the simplest of all possible actions in case I was wrong. It is more difficult, interesting and professional (remember about the big players) to use hedging of previously opened positions instead of moose.
When using a stop loss, one complete transaction is always made (in fact, of course, two, bought and sold or vice versa), for example, took a long position at a price of $100 and closed in the red at a price of $97. In the case of a hedge, the trader's task becomes more complicated and becomes more interesting and instructive (in my opinion). And at least two complete transactions have already been completed.
We buy an asset for $100, let’s say at 3% of our bank, then something goes wrong, we see that we were initially wrong, the price is already $95. There are all the prerequisites for a subsequent fall, and a decision is made to open an opposite position. To do this, you can use a completely different adjacent asset, or you can use the same one.
For example, LTC was taken long for a small part of the bank at $100, the price went to $95, there is a threat to go to $85, a short is opened. From this moment, no matter where the price goes, be it $70, $50, or $150, the trader loses the same 5% of the money invested in the long position. I call this a "negative lock". Even if the conditional litecoin merges by 90%, the minus will still remain the same - 5%.
But this is only the easiest part; then you need to try to get out of the current negative trade (losses have not yet been realized) into a plus, or at least to zero. Fortunately, having fixed the “negative lock”, the trader has a lot of time and there is no psychological pressure on him (if he was not cutlet) to resolve this situation in his favor.
So, the conditional LTC falls to $90, then to $87, but we see from the chart that the $75-85 zone is locally quite bullish and we can expect at least a slight upward rebound from it. A 5% rebound is quite enough for us to break even. Now the task is to catch a local upward reversal by first closing the short (taken as a hedge at $95) with a plus of 16% at $80. And then, if everything went well and the price really rebounded, let’s say to $90, then we close our initially open long at minus 10%.
In total, we get two complete transactions at once, closed at a total cost of +6% (plus 16% on the short side and minus 10% on the long side). Yes, this is a simplified example to understand the mechanics themselves. Ideally, wait for a strong, relatively long-term downturn with a lot of price imperfections (gaps, a lot of uncollected liquidity from above), a descent to strong resistance, and only then cover the short “leg” with a plus. This way there will be a much greater chance that the price will not only rebound, but will also rebound strongly or even reverse, thereby providing the trader with a fat plus in the end.
And of course, if the broker’s deposit and limits allow, you can close the “legs” in parts, and not all at once. In this case, we will get more than two full transactions, instead of just one, if initially we would have simply closed in the negative with a stop loss. Thus, hedging not only gives you a chance to “pull” a losing position into profit with relatively little risk, but also teaches you not to look for easy ways and get out of difficult situations at a distance.
Of course, the notorious big guy uses different tools at the same time. For example, it longs the national currency and shorts shares of exporters as a hedge, and vice versa. Or he buys top US stocks and shorts the VIX volatility index. They buy gold futures and sell shares of gold miners. And so on.
If you trade only crypto, then the list of instruments is usually limited to stables, Bitcoin, alt and national currency, which of course is not good. But here, too, you can and should try to get out of trouble unharmed. In my opinion, this is the only way to become successful and survive at a distance of 3-5 years or more.
Everyone has bad trades and decisions, even large funds with a bunch of professional traders and analysts fail or sit with significant unrealized losses. It’s easy when you enter successfully and correctly. Everything is relatively clear here, take your profits in parts and be happy. It’s much more difficult when you turn out to be wrong, but don’t admit defeat in the moment, immediately turning into a minus. And you are trying to correct the situation in your favor, and in the end get at least zero money from a complex transaction.
