The cryptocurrency market is one of the most volatile there is. The exchange price of Bitcoin or other coins can vary several times a day, first showing growth, then falling, and then growing again, and so on ad infinitum. There are two main models of behavior among the cryptocurrency players just as on the financial exchanges: buying coins at a low price (as most traders do) or buying coins at the time of their peak, at the all-time high price. Of course, it is easier and less expensive to buy currency at a low price and wait for its growth. Not a single coin, however, has shown only growth without falls, so it is important for a cryptocurrency trader to be able to play on downtrends or enter a short position.
The Essence of Shorting
To open a short position is to take cryptocurrency in debt and sell it on the exchange at the current price. After the depreciation of its value, the trader purchases the cryptocurrency at a lower price, gives back the borrowed sum, and earns a profit on the difference between the cost of buying and selling. For example, if you first sell Bitcoin at $7,000, then after its falls by a certain percentage, say, down to $6,500, you buy again, you can make a profit of $500, or about 7%.
The loan is provided on the exchange by other market participants, who are rewarded for this in the form of interest income. It depends on the term of the loan at a non-fixed rate. Many popular crypto sites, such as Bitfinex and Kraken, provide margin trading services, allowing users to borrow capital at a relatively high percentage to increase their leverage, so the entire process of borrowing cryptocurrency for shorting is automated and configured by default.
Conditions for Shorting
Shorting requires traders to have the skills and readiness to conduct proper analysis. Therefore, not everyone who plays on price hikes can successfully profit on a falling market.
Professional traders know the psychology of the newcomers of the industry. They know when they will sell their currency and thus play on their instincts by shorting. Experienced players wait for such moments and begin the process of "compression.” Compression allows one to get the maximum revenue from the created pressure on the market orders. To avoid losses, one should not enter the market at the time of this process of short positions and make sales at the top of the price hike. In addition, it is best not to start opening short positions on the exchange in the first and last hour of a typical trading day, which are usually filled with false movements created by market players. It is better to target the time zone of the exchange's headquarters or the audience the site is intended for.
A high volume of trades and the presence of demand are needed for the price growth of a particular cryptocurrency. At times of low volume and demand, the value of the asset may decrease. The fall of the market can stop resumed sales (they can start at any time without any particular reason), and this is the main problem for traders who play on downtrends. If the overall market believes in a rise, or in a bullish trend, then assets can likely either break through the lower level of support or push higher.
Many traders make purchases on impulse, when one cryptocurrency or another has quickly increased or decreased in price, and use a variety of different trade tactics. It is necessary to monitor the indicators of coins in pursuit of sharply falling assets. As a rule, the process of shrinking shorts begins when market participants are ready to sharply reduce prices.
It is believed that relatively non-volatile currencies are safe for short games. One should acknowledge the number of traders in a bearish market, as it has considerably fewer participants than a bullish market. This means that most long actions can suppress short positions. When shorting, one must remember that if the cost of a cryptocurrency has fallen by double, then it is possible to earn more than 50%. In contrast, if the price has doubled, then the loss will be 100%. Therefore, when playing on a downtrend, one needs to be cautious, since the cryptocurrency market affects even the most experienced traders with its volatility and trend reversal.
The main essence of trading in a bearish market is to use several opportunities to open a short position. Each of them can be used depending on the behavior of the market. The first option involves selecting currencies whose movement is directed toward the level of resistance, and the second involves working with currencies of minimum coiled spring or relative strength. When carefully applied, both methods allow us to find weak currencies which are likely to fall even further in the near future.
After the moment when the trader has determined which currencies are decreasing in price, it is necessary to accurately pick the moment of entry into the short position down to the minute. This will determine the profit of all activities. To do this, one needs to use model technical analysis, which will determine the ideal starting point of the game on a downtrend. An indicator of what one needs to do to cease actions can be a triangle, or the movement of the graph in the form of this geometric figure, or a “double top,” when the price peaks at a similar price level two times. It is worth paying attention to short-term price indicators when dealing with decreasing prices in the crypto market. If the market shows a declining trend, but does not completely satisfy the characteristics of a falling market, it is advisable to investigate the short-term price indicators.
The opening of a short position can bring maximum revenue only if the asset price is sharply reduced. Therefore, it is critical to accurately calculate the moment of opening and closing an order.
Play on Downtrends
Despite the fact that a short is not the easiest means of earning, it is effective. After all, the market rises up stairs, and descends on elevators, which means that there will be more dramatic falls than rises. Therefore, one can make faster profits in short positions than in long ones.
Because of its impermanence, the crypto market requires short-term traders to have the ability to play on downtrends. If one buys assets and keeps them in the hope of a rise in prices, then, most likely, they will lose their investments. In addition, shorting shows the weakness of the asset, and bears help prevent bulls from succumbing to self-deception and avoid investing in useless assets.