Just like a traditional derivative instrument, a leveraged token gives you exposure to a crypto asset. As the name suggests, it uses leverage to maximize or minimize exposure, depending on the market's direction. Hence, before you begin to trade leveraged tokens, please remember that it can be a double-edged sword.
If you are new to Binance leveraged tokens, you should first familiarize yourself with the basics and learn how this innovative instrument works.
If you have read the Binance leveraged tokens overview, you should understand why leveraged tokens are not a long-term investment. Instead, they work well in capitalizing short-term market trends.
Now the question is, how do you trade short-term trends? And what is the best way to do it? The obvious answer lies in technical trading strategies. These strategies are basically short-term tactical trading. You have to precisely know when to enter and exit out of the market. There are two key factors to consider with technical trading strategies: the direction of the underlying asset and volatility.
This article shall dive into how you can trade leveraged tokens in trending markets and maximize your winning potential in every trade. Here are the three essential tips that you should consider.
Tip # 1 – Know Your Leveraged Token
First and foremost, it pays to do your own research and understand the underlying crypto asset that makes up the leveraged token. Factors such as volatility can impact the performance of leveraged tokens. As such, you must be aware of how each leveraged token performs historically. Some crypto assets are extremely volatile compared to others, and ignoring the volatility effects can destroy your trading capital.
For example, the historical volatility of Bitcoin is 71.
On the other hand, the historical volatility of EOS is only 41.
As shown, EOS price has displayed a range-bound price action in the last two months. Meanwhile, BTC has been on a parabolic run with higher volatility than EOS. If you trade BTC tokens and EOS tokens with the same trading strategy, it would be detrimental to your trading capital. Therefore, you should individually assess the underlying asset's volatility and identify the tokens that suit your strategy.
Understanding volatility is not only crucial in picking the right tokens for your strategy, but it is also a critical factor that can help mitigate risk. Leveraged tokens are susceptible to volatility decay, which causes your investment to erode in value during volatile and range-bound markets. Thus, you must understand the prevailing market conditions and the historical volatility of a particular leveraged token.
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Now that you know what to look for in a leveraged token, you should cross-check tokens' historical volatility and cherry-pick ones that are suitable for your trading strategy.
Check out the full list of Binance leveraged tokens here.
Tip # 2 – Trading Breakouts with Leveraged Tokens
One of the most profitable ways to capture short-term trends is through breakout strategies. As mentioned, leveraged tokens work well in trending markets. As such, we want to carefully time our entries when market conditions are in favor. This ideal market movement occurs when prices break out from a range. Let's study how you can apply breakout strategies with leveraged tokens.
A common breakout strategy uses the Bollinger Bands indicator to measure expansion in price volatility. The Bollinger Bands consist of three bands, which revolve around a centered simple moving average (SMA), with the default value of 21, of which 85% of the time, the price is held within the following default boundaries:
Lower band – SMA (minus two standard deviations)
Upper band – SMA (plus two standard deviations)
In a volatile market, Bollinger bands widen. Conversely, in a less volatile market, the bands narrow. A Bollinger band breakout strategy can be used to trade short-term trends in leveraged tokens. As prices cross above the upper Bollinger band, it signals that prices are supported with strong buying pressure. Conversely, when prices cross below the lower band, sell-pressure dominates.
For instance, when the price of a leveraged token climbs above the upper band, it should be considered as a valid up-side breakout. In this case, you could buy a 'UP' token to ride on the bullish momentum. This allows you to generate leveraged gains when the underlying crypto asset goes up.
In the 4-hour chart of BTCUP shown above, you can see that the strategy can be profitable in trending markets.
Of course, the parameters of this Bollinger band strategy depends on your own level of aggressiveness. For conservative traders, you can widen the parameters to filter out low probability signals.
With Bitcoin’s recent upsurge, BTC leveraged tokens have been very popular as traders jump in to get a piece of the action.
Tip # 3 – Trend Trading with Leveraged Tokens
As the saying goes, the trend is your friend. Trending markets are great for leveraged tokens. In a bearish market, DOWN tokens that aim for inverse or short performance are likely to excel. In contrast, the UP tokens should be large gainers in a bull market.
As we discussed earlier, you should pick trending and volatile leveraged tokens because leveraged tokens are specifically designed for short-term trading. And to identify short-term trends better, the Triple Exponential Moving Average (TEMA) indicator is a tool most traders rely on.
As you probably guess, the basic signal of the TEMA indicator is the same as with any other moving average – the price crossover. When the price crosses above all three exponential moving averages, we get an entry or exit signal in the respective direction.
The chart above shows a clear trend in ETHUP as prices crossed above the TEMA indicator from $20 to $22. A rising TEMA indicates that a trend is gaining strength. In such situations, you should look for opportunities to go long the leveraged token or increase your exposure.
You can combine the TEMA indicator with volume indicators such as On-Balance-Volume (OBV). When both TEMA and OBV indicators are rising, it tells you that price momentum is very strong. When both indicators are in confluence, you get a high-probability trade.
Bonus Tips When Trading Leveraged Tokens
Bonus # 1 - Don’t own too many markets
Underlying crypto assets in leveraged tokens tend to correlate with one another, especially when the entire market is heading in the same direction. While it's nice to have a breadth of choices, simultaneously trading too many markets can become distracting and often leads to losses.
Bonus # 2 - Leveraged tokens aren’t buy-and-hold investments
If you’re buying a leveraged token as a long-term investment, you’re using the tool the wrong way, and it is comparable to using a screwdriver to do a hammer’s job.
Investing in leveraged tokens for the long-term may sound lucrative in theory. However, in reality, there are significant risks in doing so. Conventional leveraged tokens are rebalanced and re-leveraged every day, and most investors fail to recognize this impact. As such, leveraged tokens' long-term performance is unpredictable because of how the compounding effect works differently.
Binance leveraged tokens (BLVT) are rebalanced only in extremely volatile markets. However, under normal market conditions, BLVT rebalances less than other leveraged tokens.
Despite the advantages of BLVT, users are not encouraged to hold tokens long-term as volatility has a significant impact on its performance.
The Bottom Line
Leveraged tokens are ideal for traders who solely depend on technical trading strategies to capture the market's short-term movements.
Leveraged tokens are not for the faint of heart. Traders who can stomach the volatility can potentially generate large gains (or losses) on their positions very quickly. By combining the tips about using breakouts and trend trading systems, you can trade leveraged tokens profitably.
That said, when trading these instruments, be sure to check the underlying asset that they track so you can have a sense of direction they will take each trading day.
Traders who bet on these tokens should have an adequate risk management strategy and be ready to close out their positions at the end of each market day.
Disclaimer: Binance does not take into account of your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Binance. Binance also does not warrant that such information and publications are accurate, up to date or applicable to the circumstances of any particular case.