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Trading Trump’s Tweets

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Trump twitter

Even after more than 500 days in office, the unconventional style that President Trump has brought to the White House continues to offer new opportunities for creative traders. The latest example of this is a set of new strategies designed to take advantage of any clues about economic data releases and company-specific news that Trump tweets out.

Trading strategies that track the President’s tweets and place trades in the market accordingly have reportedly been used successfully on a number of occasions. One example was immediately following the announcement of new tariffs on China and the EU, when Trump’s tweeting directly affected both metal prices as well as individual companies.

Trading Trump's Tweets

On GitHub, an online hosting service for computer code, interested traders can even find an open-source trading bot called Trump2Cash that scans Trump’s tweets for any mentions of publicly traded companies, and then uses sentiment analysis to decide on whether the tweet will affect the stock price of the mentioned company positively or negatively. The bot then proceeds to automatically place a trade in accordance with the expected market reaction to the tweet. You can read the full background story of the bot in this blog post.

 

Another interesting strategy that has been proposed is to pay attention to the self-praise coming from the President’s Twitter account. For example, one could pay attention in the hours and days leading up to the first Friday of every month when the US Department of Labor releases its monthly Jobs Report at 8:30 AM. It’s well-known that senior members of the administration are briefed on the data the evening before it is released to the public, and it appears they sometimes have a hard time keeping quiet about it.

Here is one example from Friday June 1st that was published at 7:21 AM:

Trump tweet

As you may have guessed, the numbers that came in exceeded expectations, with the unemployment rate dropping to an 18-year low of 3.8%, better than the forecasted 3.9%.

How to trade tweets

Other than the trading bot mentioned above, the next question now becomes how can we trade on these tweets. To keep things simple, let’s stick with the above tweet as our example case.

  1. The most obvious way to trade this would probably be to go long the US dollar against other major currencies like the Japanese yen or the euro. For example, anyone who bought USD/JPY right after Trump tweeted, could have made 0.40% by selling again within 2 hours.
  2. For those who prefer the stock market, going long the S&P500 would also be a natural choice. The problem here is that the numbers are released before the stock market opens in the morning, meaning prices have most likely already rallied by the time you are able to trade. One way around this would be to buy index futures on the S&P500 or a CFD (they are normally traded 24 hours) with the index as the underlying asset. On the day of this tweet, we saw a strong rally in index futures shortly after Trump’s tweet was published.
  3. Another strategy involving precious metals would be to go short gold, for example by shorting the popular GLD ETF or by shorting CFDs or futures tied to the gold price that are traded around the clock.

Since Trump’s tweets are public and for anyone to see, the trick here is to be prepared when numbers are expected to be released, and then act fast. Trump is a president who undeniably does things in a very different way from what most market participants are used to. As traders, our job is not to judge on how politicians do their job, but rather to take advantage of every single opportunity they hand us to make money from the market.

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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BitMEX Liquidations: How to Avoid Getting Rekt

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BitMEX Liquidation

For those Bitcoin traders who like to trade with leverage (and lots of it) they will most likely end up at BitMEX.

This exchange based in Hong Kong is well known in the Bitcoin community for being one of the most efficient and sophisticated Bitcoin futures exchanges on the market. With leverage up to 100x your initial investment, traders relish the high-risk, high return nature of the exchange.

However, BitMEX is a profit maximising futures exchange. Although they give traders the opportunity to make large returns on positions, they have become incredibly efficient at mopping up loose change. This easy money is handed on a plate to them by new traders who make silly decisions.

In this post we will take you through one of these bad decisions that you can easily avoid and reduce your chance of becoming liquidated or, in crypto lingo, “Rekt”.

BitMEX 101

Before we can take a deep dive on the nature of BitMEX order types, we have to give you a quick overview of BitMEX.

BitMEX (Bitcoin Mercantile Exchange) is a futures exchange that operates out of Hong Kong. It was started in 2014 by a team of ex investment bankers and traders. It is perhaps best known for being the first exchange to offer leveraged derivative products on Bitcoin.

These futures on BitMEX are not the regulated type that you have read about on the CME or CBOE. These are futures contracts that are traded on the open order books on the BitMEX exchange. They are not regulated and can be traded by any retail cryptocurrency trader.

BitMEX has grown substantially since their early beginnings and have rode the crypto wave more skillfully than most other exchanges. In fact, they recently broke a record for total volume of more than 1m BTC in a 24-hour period.

It’s safe to say, BitMEX is successful.

How BitMEX Margin Works

When you are doing any sort of leveraged trading on exchanges, you are required to put up margin for your account. These are required to make sure that the exchange or broker is not left holding the bag should the position quickly move against you.

Initial margin is required in order to cover the position of your futures contract. This initial margin is determined according to the amount of leverage that you have decided to take on. For example, if you are using 1:100 leverage then your initial margin is going to be 1% of your position.

When you place a futures trade on BitMEX, you are actually trading what is called a “limited risk” futures contract. Your losses cannot exceed the value of your initial margin.

This asymmetric payoff profile is one of the reasons that BitMEX is often chosen by traders. It gives them all the upside and limited downside. In fact, the payoff looks almost exactly the same as the payoff of a financial option. Below is a simple illustration of how the payoff looks.

Payoff of BitMEX limited Risk futures

How does BitMEX allow you such a favourable position?

This is because of the way they determine the Maintenance Margin Requirement (MMR). With usual brokers in traditional finance, when you breach your maintenance margin requirement, you will get what is called a “margin call”. However, BitMEX has something much more efficient and that is their Liquidation engine.

This is basically an automated system that will immediately close out positions that have already moved against the trader and have started eating into the initial margin.

What is the catch?

The relationship between the MMR and the initial margin is not constant and will vary arbitrarily according to the amount of leverage that one is taking on.

Liquidation price vs. Bankruptcy Price

BitMEX uses two prices that will determine levels for initial margin and the MMR. Your bankruptcy price is the price at which your initial margin has been exhausted and your loss from the position is 100%.

The liquidation price is the price at which you have exhausted your MMR and it is the price at which your position will be closed. This is done in order to protect BitMEX from the adverse and potentially harmful moves in the price of Bitcoin. You can read more about BitMEX liquidations here.

When you are placing an order, you will see your liquidation price as it presented in the order form. There is, however, no bankruptcy price being show to you upfront. This means that you can’t see how far the bankruptcy price is from the liquidation price and hence how much room your trade has to move from your complete initial margin.

Order forms with liquidation on Bitmex. Left with 100x leverage, Right with 1x. Image source: Bitmex.

By not showing you the difference between your bankruptcy price and the liquidation price, BitMEX is hiding away a secret edge that they have when it comes to high leverage contracts. That edge is the amount by which BitMEX will allow the trade to eat into the initial margin before they liquidate it.

This may sound like a bit of a mouthful right now but it helps to take a look at some examples as well as some actual numbers.

Statistical Edge

When your position is getting closed at a liquidation price that is further away from the bankruptcy price, you are being denied extra price participation and the chance for a market recovery. You are giving BitMEX the statistical edge in the long run even though a large proportion of your initial margin was not used.

It helps to take a look at some numbers in order to contextualize this. Below are the calculations for the bankruptcy price, liquidation price and the resulting margin rates. This is live data and you can monitor it yourself with this handy tool.

Liquidation and Margin Calculations on BitMEX. Image source: BambouClub.

What this shows is the amount of theoretical MMR you will have on a BitMEX long futures trade and how large this number is compared to the initial margin. This is all calculated by using the liquidation price given by BitMEX and the bankruptcy price which is calculated separately (based on the leverage).

From these two numbers, one is able to get an idea of the initial margin as well as the MMR that is being applied to that trade. As you can see in the second last column, the MMR is larger as you take on more leverage (as would be expected).

However, what is really interesting is viewing this relative to the initial margin. This is the last column in the sheet and this shows that for larger leveraged trades, the MMR makes up an increasingly greater percentage of the initial margin.

In the case of the 100x leverage trade, the position would have to move only $35 away from current prices and it will be liquidated. Hence, even though you have put up $70 in initial margin (price move from spot to bankruptcy), you will be liquidated when the price has only being moved to half of that ($35 MMR).

When you take a look at the numbers for the 10x leverage, the effect is way less pronounced. Your initial margin is $639 and you won’t get liquidated until the price has moved $609 away from the spot level. Hence, you are allowed to participate in a change in price that is almost 95% of your initial margin.

Put another way, the MMR of 10x leverage position is only 4.58% of the initial margin. This is more than 10 times below the 50% of initial margin MMR that is required for a 100x leveraged trade.

So, from a purely statistical perspective, the 100x or 50x leverage trade is not the most efficient trade to make and can in the long run give BitMEX the edge.

Lower Leverage, Less Liquidation (LLLL)

BitMEX is a well-oiled machine and they are very efficient at closing out the riskiest trades. Their risk management protocol comes at the expense of your long-term trading profits.

This is nothing against BitMEX and they are doing exactly what any high leveraged trading operation is doing. They have to make sure that they always have enough funds to cover losing trades.

In fact, BitMEX even has a reserve fund that is used as insurance on those occasions when they cannot stop losing positions fast enough. This insurance fund currently has a balance of 12,336 XBT.

However, if you want to avoid funding the BitMEX insurance fund, don’t trade at 50x or 100x leverage.

The 4 “Ls” will save you in the long run. Lower Leverage -> Less Liquidation

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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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5 stars on average, based on 3 rated postsNic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs.




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Crypto Spoofing & Washing: How Whales are Eating Your Lunch

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When it comes to the cryptocurrency markets, there are two tactics that the whales have been using with killer effects over the past year.

These are order spoofing and Wash trading. These tactics are methods of market manipulation that they have been using to reap outsized returns. These returns have all come at the expense of the retail cryptocurrency trader who fell for the dirty tricks.

In this post, we will take an in depth look at these tactics by analysing previous episodes of crypto spoofing and wash trading. We will also give you information about how to spot these attempts and avoid falling victim.

Before we get onto that, let us start with some of the basics…

What is Order Spoofing?

Quite simply, order spoofing is a form of market manipulation where an individual will create a host of fake orders with no intention of ever having them executed. This is done in order to create a certain perception around where the market is heading.

The individual who is doing the spoofing is hoping that this market sentiment will impact on the price of the asset in question. They will usually have a position in the asset that will benefit from a movement in the price.

Order spoofing is actually a tactic that has been outlawed by the SEC and has been actively prosecuted in the past. However, when it comes to the still unregulated and anonymous cryptocurrency markets, things are not as easy as they seem.

Sometimes order spoofing is combined with other tactics such as stop loss hunting where the trader will try identify where stop orders have been placed.

What is Wash Trading?

Wash trading is the practice of faking volume. This is done by a trader or a group of traders buying and selling their own orders for a particular coin. It gives the market the perception that there is interest in a coin when there isn’t really.

It is also sometimes practiced by shady exchanges in order to create the perception that a great deal of trading is taking place. This will dupe potential retail traders into using the exchange.

Just like order spoofing, this has been outlawed in traditional financial markets since the passage of the Commodity Exchange Act (CEA) in 1936. Wash trading is also very hard to get away with in traditional financial markets as the exchanges have a number of built in protections to avoid it.

Now that we have an understanding of the basics of the manipulation, let’s take a look at some examples in practice.

Spoofing and Washing in the Wild

You may have come across Bitcoin order spoofing before. You would have observed a large buy or sell wall in an exchanges order books that would have appeared and disappeared seemingly out of nowhere. This is the trader placing and removing the order at the chosen times.

For example, if you take a look at the below order books from the Bitifinex exchange a few weeks ago. You can see a massive buy wall with a large order of slightly more than 11,000 BTC at a price of $7,750.

Recent Buy Wall with Large Order. Image source: Cryptowatch

If you were a cryptocurrency trader who was just observing the order books as an indication of market sentiment, you may perceive this a bullish indicator. It will lead you to buy Bitcoin in anticipation of a rally.

Many other traders will follow in your footsteps and the price will rally in response to it. However, what you do not know is that the Whale that has placed this order actually has a long position in Bitcoin and is looking for buyers where he can offload his position at a profit.

The moment that the whale has secured a certain amount of profit from his spoofing endeavours, he will pull the orders from the book. Consequently, that solid buy wall will disappear in front of your eyes. Below is another image from the Bitfinex order books from late last year.

Buy wall disappears from Order Books. Image source: Bitfinex’ed

On the left is the order books attempting to create an illusion of a Bitcoin buy wall with a large order at $8,900 for 502BTC. However, on the right is the exact same order book a mere 5 minutes later. As you can see, the massive buy wall has just evaporated.

It’s likely that the person who had placed that 502BTC order had no intention of it ever getting executed. In this case, the trader realised that their spoof was not convincing the market and decided to remove their orders.

How would this effect you?

Well, if you thought that this was a bullish sign of movement you could have placed a buy order at $8,899. This would have been executed but you would also have noticed that the market had in fact retreated. The expected bullish sentiment was nothing but a fake.

Now lets take a look at an example of some wash trading.

This is a practice that exchanges can easily manage given the amount of funds that they have on their books. In the below image we have a well-researched example of some wash trading on the OKex exchange for LTC / BTC. Notice anything weird?

OKex Volumes on LTC/BTC Pairs. Image source: Sylvain Ribes

As you can see from the volume, the one thing that immediately sticks out is regularity of it. The volume goes through regular peaks and troughs throughout the day. It is highly unlikely that this is as the result of manual market flows through the books of OKEX.

All one need do is take a look at the LTC order books of another large exchange such as Poloniex or Bitstamp and you will see no such volume irregularities.

When fake volume is created, it makes the market think that there is activity in a coin or exchange when there is really none at all. There have also been other exchanges which have more recently been accused of these tactics.

How to Avoid Falling Victim

When it comes to order spoofing, there are generally quite a few things you can do in order to determine where the activity is taking place and how to spot it.

Firstly, before deciding on an exchange to trade with, you study their market statistics with tools such as cryptowatch. Here, you can take a look at all the exchanges and monitor their books in order to spot irregularities.

What you will be looking for are the large buy / sell walls that are often present on exchanges. If these walls have appeared at a time when there is not that much market news or movement, then it should already have piqued your interest.

What you will then want to do is monitor that buy / sell wall with a particular interest on the large order at the top of the wall (closest to market rates). If this order is pulled quickly after it has been formed then it is likely to have been a spoof and an attempt to manipulate the markets.

When it comes to washing, you should always be cautious when you observe high volume on an exchange that you have not heard a great deal about. This is especially true for those newer exchanges that have only been operating for a few months.

However, if you wanted to be able to spot wash trading as it happens, you will usually see a host of rapid executions at a stable price for a particular coin. Below is an example of some washed trades that were placed in an order book. As you can see, there was a whole host of “wash sells” that were placed at a price of $293.

Numerous washed sell orders on exchange. Image source: Cryptocurrency Facts

If you have observed these in the order books it should have raised suspicion that you could be witnessing a large wash trade.

An Ongoing Challenge

Although these tactics are able to help you by identifying suspicious activity, the malicious traders are also evolving. Nowadays most of the spoofing and wash trading is done with advanced high frequency trading bots.

These bots make use of the high through-put API connections on multiple exchanges in order to move markets more quickly than a manual trader. These trading bots have also previously been identified and given unique and interesting names such as the “Picasso trading bot“.

There is reason to be hopeful though.

The authorities are now quite aware of these tactics and are actively getting involved with enforcement. In fact, the US DOJ has recently released a criminal probe into the market manipulation practices on cryptocurrency exchanges.

As these opaque exchanges face more regulatory scrutiny, they are likely to adapt their procedures to actively stamp out the practice. They could also borrow a number of oversight mechanisms that are currently being used on stock exchanges for example.

Conclusion

Cryptocurrencies have taken off quicker than the traditional financial system and regulators have been able to adapt. While that has led to reams of innovation, it has also meant that malicious actors could take advantage of the lack of oversight.

Order spoofing and wash trading are those market manipulation tactics that are being employed in these “Wild West” markets. Although there are moves afoot to stamp these out, the tactics are evolving and innovating just like the underlying technology.

In the end, only you can really protect yourself from this manipulation. As long as you are aware of what to look for and which exchanges to avoid, you can prevent yourself from being a crypto whale’s “lunch”.

Featured Image via Fotolia.

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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5 stars on average, based on 3 rated postsNic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs.




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A Trading Strategy For Big Announcements

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Traders love volatility – this is no secret. The number one thing that is going to help a trader make lots of money is volatility in the markets, and this is a lot of what initially attracted so many people to trading cryptocurrency. There was high profit potential without the need to leverage up.

And one thing that tends to put even more of an emphasis on the swings in the markets are large announcements. These tend to cause dramatic increases or decreases in the value of a cryptocurrency, and then temper out over time.

Coinbase Has the Pull

There are few things that will cause a massive swing in the prices of cryptocurrencies. You could have a country like Japan ruling favorably in terms of cryptocurrency regulation, or you could have South Korea cracking down on exchanges. These would both have a strong effect on the overall sentiment towards the sector. Additionally, if there was a major breach on an exchange or with a cryptocurrency protocol, that would have a massive affect too.

But on a micro-level (with a focus on certain cryptocurrencies), one of the highest causes of volatility is an announcement from Coinbase. As the largest and most reputable exchange, when they make an announcement regarding what coins they intend to list, there is usually a massive run-up in price. Following that, there tends to be a retracement back to the previous levels.

Recently, Coinbase announced it was considering adding Cardano, Basic Attention Token, Stellar Lumens, Zcash, and 0x to their exchange. This would be a significant expansion to their offerings, and it isn’t clear what the timeline is or how certain they are of moving forward with this, but it did cause quite the ruckus in the markets.

Similarities to the Equity Market

These swings are similar to a phenomenon that occurs in the equity markets. Usually with binary outcomes, there are similar spikes in volatility followed by a regression to the mean. This may occur when companies announce their quarterly earnings, as they can either outperform or underperform the predictions, but it bears the most similarities to announcements in the healthcare industry.

One of the most binary outcomes that can be announced is whether a drug has received FDA approval or not. The markets tend to show that when an announcement is made, there is a massive spike or drop in the price (depending on the result) and then the price moves back to its original levels in a short period of time. How similar does this sound to Coinbase announcements?

Two things are happening here. First, you have a perceived increase of the risk of an investment, and then the volatility dissipates as investors realize that the fundamentals of the stock (or cryptocurrency) have stayed the same.

How to Trade More Intelligently

When Coinbase makes an announcement such as this, there is no actual appreciation in volatility. There are just deeper liquidity pools. This can be a large positive for a company, since there are more people with access to the coin, but often investors think they are getting quick returns and then find out there isn’t demand behind the trade. None of this is to negate the fact that there is higher liquidity and this is a positive signal for the cryptocurrency, but the end effect on the price is somewhere in the middle of the first reaction and the retracement.

So knowing that the general tendency is for an overreaction that moves back towards the norm, the best thing to do might be to buy the dip. If a cryptocurrency receives positive indications from Coinbase, wait until it retraces back to earlier levels, buy the dip, and you should be setting yourself up for long-term profits.

Avoid Trading Based on “FOMO”

The crypto-world works very different from the equities world in that there are a large amount of retail-level investors who have massive pull because of their blogs and the high value placed on their opinions. This means that sentiments such as fear of missing out (FOMO) play a large part in the markets (many credit the December 2017 run-up in prices to FOMO), and should be factored into your analysis. Any buy you make should be with the long-term in mind, and it helps to understand trading trends such as the one outlined above.

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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