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Trading 101

Lessons from The Turtle Traders

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For those of you who haven’t heard about the so-called turtle traders before, I’ll give you a brief recap here: “The turtles” were a group of laymen traders who were chosen more or less randomly to be coached by two of the pioneers in trend-following trading; Richard Dennis and William Eckhardt.

While Dennis, who had already made more than $100 million in the markets, were convinced that anyone could learn to trade, Eckhardt argued that Dennis was a gifted trader and that it would be extremely difficult for someone else to replicate his success. Unable to come to an agreement, the two men figured that the only way to settle the dispute would be to conduct an experiment where they would teach ordinary people their own trading system, and then measure the results.

As the story goes, the turtles became hugely successful, and Dennis was proven right.

Their story became known to world mainly through Michael Covel’s books Trend Following and The Complete Turtle Trader, where he shared some previously unknown details about the very simple trading strategies and methods used by “the turtles.”

Although the turtle experiment took place back in the early 1980s, the lessons learned from the experiment are as valid in today’s crypto market as they were in the commodities market Eckhardt and Dennis were trading in back then. In this post, I therefore wanted to share some of methods used by the turtles that can hopefully help you improve your own trading performance as well.

If you are interested in learning more about the methods the turtles used, I recommend reading Covel’s book to get the full story.

ATR as stop-loss

Using the Average True Range (ATR) indicator as a trailing stop-loss is something I learned from Covel’s book about trend following and that I’ve used successfully over the years, as I wrote about in another post about a trend following trading strategy.

Generally, the idea of using trailing stops in trading is that it allows you to ride the trend for longer, without taking on unnecessary risk. It is also in the very essence of trend following trading that traders should not try to predict where a trend will start or stop, but instead simply react to what the price is telling them. In this context, if the price breaks through the ATR line you have drawn up on the chart, it is telling you that the trend has ended and it is time to get out of the trade.

The ATR is calculated based on the volatility of the asset, which means that perfectly normal market movements will be classified as noise, and only extraordinary movements to either side will lead to price breaking through the ATR line.

TradingView has a very useful built-in indicator for using the ATR as a trailing stop called “ATR Stops.”

Maximum 2% risk on each trade

Since the turtles used the ATR as their stop-loss, the risk in terms of pips on each trade would naturally vary depending on the asset they traded. However, by adjusting their position size, they still managed to keep their risk at no more than 2% of their trading account on any one trade.

Pyramiding

Pyramiding is the concept of adding to a winning trade as time passes. This is pretty much the opposite of conventional value-based investing wisdom, where it is usually preached to buy low and sell high. The turtle traders, on the other hand, were not afraid to buy high and sell when things were moving against them (buy high, sell low).

The turtle traders usually didn’t move in with the full position size that their risk management allowed on the first order, but would instead spread out their orders and buy more as the trade moved in their favor. For example, they would enter an order with a position size that kept their risk at 0.5% of their capital as a trend started to form, and then enter new orders as the trend continued until they reached the 2% risk that their system allowed for.

This protected their downside if the trade moved against them from the start while at the same time enabled them to ride the trends until the end.

Reduce risk during losing streaks

The turtles were very aware of the emotional drawdown that follows a loss in the market, and they understood that because of this, losses tend to follow each other and create losing streaks from which traders sometimes never recover.

Because of this, Dennis and Eckhardt introduced a rule saying that if an account is down by 10%, the trader must adjust his risk as if he has lost 20%. With a smaller trading account left, the trader would then be forced to reduce his risk on each trade in order to stay within the maximum 2% risk allowed on each trade.

Not only did this save the turtle traders’ trading capital, but it saved their emotional capital as well.

Keep it simple

Lastly, it is important to remember that the exact trading system the turtles used was relatively simple and straightforward. Trend following trading is often like this, and it has been proven over and over again that simple and robust systems beats complicated strategies. As Richard Dennis was quoted as saying in the Market Wizards book:

“I always say that you could publish my trading rules in the newspaper and no one will follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick with those rules even when things are going bad.”

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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Trading 101

Insights Into Bitcoin Futures Contracts: Part 2

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This article is the second piece dedicated to explaining bitcoin futures and how they impact the underlying price of BTC.

Periods of Validity

Bitcoin futures are instruments with a limited maturity date. Each contract has its own maturity date (the date of completion of the transaction), after which the contract is considered invalid. According to the validity period, futures are divided into quarterly and serial.

Most futures are quarterly futures. These are standardized contracts for the purchase/sale of transaction objects that are executed in the last month of each season. The last trading day, as a rule, falls on the period from the 15th to the 20th day of each last quarterly month and is indicated by the following symbols:

H – March
M – June
U – September
Z – December

Serial futures are intermediate contracts whose maturity date falls on any other month of the year that is different from the last quarterly. The last trading day of such futures, as a rule, falls on the third Friday of the month. The closing date of the contract is specified in the specification of the futures agreement.

Bitcoin futures present on CME and CBOE and have their own expiration dates:

  • For CME contracts, this is the last Friday of the month or the day preceding it if a holiday falls;
  • For CBOE contracts, the expiration date is the second business day before the third Friday of the month.

Futures Trading Terms

In 2018, direct work with Bitcoin futures is supported on several cryptocurrency exchanges, including OKCoin and BitMEX. As Hacked reported, during the height of the recent downturn, transaction volumes on BitMEX surged to over 40% of the entire market.

If you want to trade Bitcoin futures on regulated platforms through an intermediary broker, you can choose one of two exchanges: CBOE and CME.

Sellers and buyers enter into a contract with the exchange, and all further interactions between them pass through the clearing house of the exchange. Futures trading in Bitcoins consists of three stages:

  1. Entry into the position: At this step, the trader, buying futures, predicts the movement of cryptocurrency value.
  2. Waiting stage: When the trader’s forecast is correct, and the value of the asset moves in the right direction, he chooses the most appropriate moment to close his position. If the forecast is not correct, then the trader must determine the moment when you can leave the market, having suffered minimal losses.
  3. Closing Stage: This is the last stage of futures trading, in which the futures holder sells a contract and fixes its profit or loss.

When futures are bought, the trader pays only the exchange commission and pays the security amount for the contract. Usually, the size of the security collateral is in the range of 4-10% of the amount of the futures agreement. Due to the strong volatility of cryptocurrency, for bitcoin futures, the size of the collateral is always increased and can reach up to 30-50%, but average is 10-20%. The less financial risks, the less will be the size of the collateral amount.

One unit of trading on the CBOE exchange is equal to 1 bitcoin (XBT ticker), and the size of the futures contract on the CME platform consists of 5 bitcoins (BTC ticker). Bitcoin futures is a settlement type of contract, and the execution takes place by determining the difference between the cost of opening a position and the value of the settlement index on the day the futures are closed. Financial indexes are administered by a special party.

How to Trade

Bitcoin futures trading does not have any particular secrets or differences from other trading instruments. The scenario is the same as in the use of other trading tools: to make a profit, you need to predict which direction the bitcoin price will go. You build a forecast for a certain period of time and buy a futures contract.

For example, the most straightforward scheme for using a Bitcoin futures contract looks like this: knowing that the cost of bitcoin will go up, at the time of writing you can buy two-month futures for 10 bitcoins at the price of $4,000 USD. If your predictions come true, and the cost of BTC really goes up, you just have to follow Bitcoin quotes in the market. If during the contract term, the price of Bitcoin rises to $4,500, you can sell futures without waiting for the maturity date and earn your $ 5,000 ($500 profit x 10 bitcoins).

You can get such a profit without Bitcoin futures; it is enough to actually buy 10 Bitcoins and wait for the quotes change in the right direction. But in this case, you will have to operate on the full value of the asset: 10 x $4,000 = $40,000. But when buying Bitcoin futures, you will need to pay only brokerage fees and pay a deposit of 10-20% on average of the futures amount ($4,000-$8,000).

As with any trading instrument, futures trading requires not only basic financial literacy but also a balanced approach to planning, analyzing and attention to details. You should study well all the conditions of the exchange, the schedule of its work, commission, fees, etc.

In order to be able to enter into a futures contract, you will need to open a brokerage account, and each exchange independently decides whether it will allow you to trade on its site or not. Margin requirements are also set by the brokers themselves.

Many trading platforms can protect assets from sudden changes in their value in various ways. For example, on the CBOE exchange, there are such rules for suspension of trading, when the price of cryptocurrency begins to change dramatically. In particular: if the cost quickly rises or falls 10%, then the trades will be stopped for 2 minutes; if the course rises or falls by 20%, the use of the financial instrument will be stopped for 5 minutes.

Futures prices also have different price formations. For example, CME sets prices, taking into account data from the crypto exchanges platforms Bitstamp, Kraken, Coinbase Pro, and ItBit, and CBOE forms the value of the futures contract, starting from the exchange rate on the Gemini exchange.

The Impact of Futures on the Bitcoin Price

There are some concerns that bitcoin futures can be used for aggressive trading. However, if the value of such contracts went out of control, then arbitrators would have intervened.

Bitcoin futures are speculative instruments that allow you to influence the value of BTC without even owning it. Critics, including some from the futures industry, argue that such contracts are premature and, in the worst case, represent a systemic risk, given the underlying volatility of the crypto market.

However, the use of futures on Bitcoin has two significant consequences:

  1. Bitcoin futures, unlike cryptocurrency itself, can be traded on regulated exchanges and this is excellent news for traders concerned about the lack of regulators in the field of digital money.
  2. New trading tools open up opportunities for using Bitcoin in areas where cryptocurrency trading is prohibited. And this will open the door to broader participation in the cryptocurrency market of giant companies and investors from different countries.

Futures contracts will bring more liquidity to the market, which, in turn, will simplify the conduct of operations with cryptocurrency and make trade more profitable. Their use is primarily intended to balance price fluctuations in underlying assets.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 29 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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Trading 101

Insights Into Bitcoin Futures Contracts: Part 1

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In December last year, Bitcoin achieved an all-time high of around $20,000 USD. One of the main factors that influenced such a price increase was the introduction of a futures contract on Bitcoin. Although the gains largely preceded the launch of the futures contract, they were partly driven on expectations of a new derivatives product being offered by CBOE/CME. In this article, I will try to explain the principle of a futures contract and how it can impact bitcoin’s price.

On 10th December 2017, CME Group launched trading in bitcoin futures, and a week later such actions were carried out by its competitor Cboe Global Markets.

The launch of CME futures has increased the legal status of cryptocurrency and has also boosted investor interest in the digital asset. The key question here is: how can this instrument make you additional money?

What are Futures Contracts?

In the world of trading, there are many different ways to buy and sell assets on exchanges, and some of them are very risky, such as margin trading. Futures contracts are a way to transfer risk, depending on how aggressively you want to trade. This concept is not new, as it has existed for decades and now applies to Bitcoin.

A Bitcoin futures contract is an agreement between two parties to a transaction that buys or sells BTC at a predetermined price at a future date. That is, the futures buyer acquires the right to sell BTC coins in the future at a fixed rate, and the futures seller announces his consent to accept the cryptocurrency on the settlement date at a fixed price.

History of Futures

The idea of creating futures contracts was initially to protect manufacturers and suppliers from sudden or significant fluctuations in commodity prices. This is a written agreement that determines the size (quantity), cost, evaluation (quality) and conditions for delivery of the goods on a specific date in the future. These instruments are traded (bought and sold) between producers, dealers or speculators (i.e., traders seeking to profit from price movements).

The first registered commodity futures transactions for the sale of rice occurred at the beginning of the XVII century in Japan. These contracts also made their way to the United States in the early 1800s when many agricultural products began to be produced. Most of these products had a limited shelf life, and the quality of stored products usually deteriorated over time, so the prices could vary significantly. Therefore, the first contracts for the future price appeared, which allowed the seller to get money for the goods before delivery.

The first American exchange was established in 1848 and was called the Chicago Board of Trade (CBOT). Its creation was preceded by the emergence of railways and telegraph, which connected the trading center with the agricultural market.

A group of brokers working in this council was able to establish a standardized and more efficient method of exchanging goods, thanks to the launch of futures contracts on the exchange. Instead of managing numerous individual agreements between interested parties, they developed futures that were identical in terms of asset quality, delivery dates, and conditions, and simplified the entire process of buying and selling future supply at the current price.

How Do Futures Contracts Work?

In practice, futures contracts look like this. For example, a farmer concludes futures agreement with a dealer that he will supply him with 10 tons of corn in early August. Both parties to the transaction receive their “guarantee” – the farmer will be paid a certain amount for the corn, and the dealer fixes his buying price in the future.

Such agreements became very widespread, and are even used as collateral for bank loans and can also be transferred. If the farmer decided that he will not sell his corn, he can directly sell his contract to another farmer. A dealer may also do so;  if his plans have changed and he no longer needs corn, he can always resell his futures on the exchange to another intermediary.

In Bitcoin futures, you also fix the price and a certain number of coins that will be sold or bought in the future. It is a tool to transfer or accept the risk. Parties to the agreements may take different positions:

  1. Buyers who have a hope to buy coins at a better price when the value of the asset increases enter into a trade from a long position.
  2. The selling side works from a short position, which will be able to get a more attractive price in the future, having successfully sold its product when its value starts to go down.

On the trading floor futures contract can be used throughout the duration. The parties may also place money in escrow to reduce the risk of the counterparty during the term of the futures contract. This is usually done only when the price begins to show strong movement to a long or short position held either by the buyer or the seller.

Types of Futures

There are two separate types of futures contracts:

  • Physical delivery futures, which are an agreement for a specific asset that will be transferred at the end of the term of the futures. An asset can be any commodity or money (oil, grain, cryptocurrency, gold, etc.).
  • Trade or settlement (non-deliverable) futures, which are a type of contract that involve the conclusion of an agreement without physically transferring the object.

Bitcoin futures produced to-date are the settlement type of the trade agreement since there is no physical transfer of the asset. All financial transactions on futures contracts are a practical tool in trading since they can perform two actions:

  1. Hedging (insurance of price movement risks)
  2. Speculation (the possibility of quick earnings on the difference in the value of the subject of the transaction)

Players involved in speculation are very interested in bitcoin’s price volatility because it gives them the opportunity to open short and long positions several times a week and make good money. Experienced traders who use technical analysis to predict movements in the market quite often make profits on futures transactions with Bitcoin.

In the next article, I will speak more about terms of BTC futures and where one can trade them.

Featured image courtesy of Shutterstock. 

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.9 stars on average, based on 29 rated postsVladislav Semjonov has a legal and financial background. He has been involved in crypto space since early 2017 in both ICO advising positions in several ICO consultancy firms, and as an ICO analyst for VC. He began contributing for Hacked.com in April 2017.




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Trading 101: 4 Reliable Chart Patterns in Crypto Trading

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In our previous piece on chart patterns, we pointed out that the way to use patterns is to judge probabilities that a certain move will happen rather than to view them as some holy grail in the market (which unfortunately doesn’t exist to my knowledge).

Although they aren’t holy grails, chart patterns are some of the best tools we can use to trade the markets with a surprising degree of accuracy. For example, some estimate that a well-known pattern like the head & shoulders have an accuracy of more than 80% when it is complete. Very few indicators can match that!

In this article, we’ll go over the 4 best chart patterns to use in crypto trading, teach you how to spot them in the charts, and show you how to trade them.

1. Head & shoulders pattern

Since I already singled out the head & shoulders as the most accurate pattern, let’s start with this classic chart pattern that most people have heard about and probably have an idea what should look like.

head and shoulders

The head & shoulders pattern generally signals a reversal in the market, as it is essentially a failed attempt of a trend to move higher. As we know, an uptrend is defined as a series of higher highs and higher lows, but in the case of the head & shoulder, the last trend wave fails at making a higher high and higher low, and a new downtrend is initiated. The opposite pattern, known as an inverse head & shoulder, signals a shift from a downtrend to an uptrend.

Since the head & shoulder is so well-known by now, and the logic is based on simple trend trading, it is often considered to be the most reliable pattern in trading. It can often be easier to spot on a line chart as it can help you filter out all the clutter otherwise found on candlestick charts.

2. Bull flag

This is a continuation pattern and is also considered one of the most reliable bullish patterns we have. Sometimes also called a pennant or a wedge, these names all essentially refer to the same thing.

Bull flag

The bull flag is formed when price enters a consolidation phase following a strong uptrend. What really happens when price is consolidating is that the market is gathering momentum for the next burst up. It is a natural part of a trend where those who have been with the trend from the beginning are taking the opportunity to realize some of their profits, while new traders are entering the market and positioning themselves for the next run-up in prices.

3. Cup and handle

First introduced in William O’Neil’s book How to Make Money in Stocks, the cup and handle pattern is a bullish chart pattern that is very well-known in the stock market, but also appears to work well in other markets.

According to O’Neil, the pattern should span a period of 1 to 6 months in the stock market. In crypto, where everything moves faster, this period can safely be cut in half. For the pattern to be more reliable, we would ideally want to see a significant rise in trading volume near the end of the handle as price begins to rise. A buy order should be entered as price breaks above the high made by the right side of the cup.

The logic behind the pattern is the same as for the head & shoulder and trend waves: the cup represents the bottom in the market and the handle creates a higher low, which by definition means that an uptrend has started.

4. Rectangle

The rectangle is a similar pattern to the bull flag and trading channels, where price appears to be “stuck” between two imaginary lines on the chart. The more touches we have between these outer lines and the price, the more reliable the pattern is considered to be.

The rectangle is a trend continuation pattern, and often becomes a waiting game for traders since it is difficult to tell exactly when the price will break out of the pattern. However, the pattern is fairly reliable at predicting the direction price will break out in. The rectangle can be either bullish or bearish, depending on the direction of the preceding trend.

The pattern can be traded either by placing an order when price is close to the lower end of the rectangle with a stop just below the lower line and then waiting for price to break out. Alternatively, you can place a buy order just above the upper end of the rectangle in hopes of catching the trade as the price breaks out. The danger with the last option is that fake-outs where price spikes up just to fall back down do occur quite frequently. As always in trading, taking a slightly more conservative approach may serve you well over the long-term.

Featured image from Pixabay.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.3 stars on average, based on 37 rated postsFredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.




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