The crypto world is synonymous with volatility, uncertainty, and significant price movements. As an investor who is well aware of this, then short selling could potentially save you. However, short selling is a risky venture not advised for the least experienced in crypto trading. Short selling is the act of selling your virtual currency at a higher value and buying it when the prices fall. This is often done when there is a prediction that market prices will fall.
Practically you will be borrowing say ETH coins from your broker and selling them at the current market price. Later when the price takes a nose dive, rebuy the coins back at a lower price and refund your broker thus making profits. Even so, it is not as easy as it sounds market predictions could always go wrong. Here is what to check for when shorting Ethereum.
Select a secure margin exchange
Short selling is often done using a margin facility from a broker or exchange. The process is seamless and automatic allowing you to borrow your coins. When short selling it’s wise to use a margin exchange platform that provides security, your preferred payment methods, and lower fees. See different options of regulated operators here.
The right margin exchange platform will ensure you have;
- High trading volume and liquidity
- Easy to use and user-friendly interface with advanced trading tools
- Quick order execution
- Highly secured platform
- One-stop shop for Derivatives such as futures, swaps, and options.
- Plenty of order types
- Built-in risk management tools
Always protect your downside with a stop loss
This trading tool is critical for crypto traders to limit their maximum losses by liquidating assets once the market prices hit a certain value. The stop loss tool helps traders have control over the trade’s risks.
Nonetheless, as an investor, you will need to have the correct market predictions to tailor the stop-loss tool accordingly lest you double your losses. Not only will you need to set a specified value but also a stop loss type which includes a full, partial, or trailing stop loss.
Don’t overdo your investment
Regardless of the strategies you use, the crypto market is never immune to losses. Ideally investing 50% or more is highly risky, and one of the ways to get poor. The best investment ranges from 6% which is safe to 20% on the higher side and is considered very risky.
However, the decision of how much to invest depends on market factors and personal factors. Among factors includes personal tolerance to risk and investment capital available. Either way, when making such an investment always invest an amount you are comfortable losing.
Confirm an overall negative market trend
Cryptocurrencies are volatile and as such prices keep on changing. However, some changes are not significant and hence should not cause you to short sell lest you incur losses. Therefore, it is important to confirm a major downward trend in market prices.
Over the past months, the crypto market has undergone two significant changes which have been evidenced by several trends by traders. The total market capitalization has shrunk by over $2 trillion. In addition, Networks such as Celsius freezing withdrawals and swaps is a clear indication of an overall negative market trend.
News will tell you where the negativity might come from
The crypto market is closely checked by various media channels since virtual currencies have gained much traction lately. As such, it is rare to miss out on any important information about any significant market crashes or price movements.
Before shorting, it is important to explore all the news avenues to understand the latest negative trends. As opposed to a few years ago, today cryptocurrencies are affected by various economic phenomena such as stocks, Fed monetary policy, and inflation. Also market fear, news, and technological progress are factors affecting the cryptocurrency market.
Currently, there are several news sites dedicated to crypto market analysis, price charts, and daily trading volumes.
Find the most vulnerable coin
With a predicted market crash most investors are always torn between which coin to sell or buy. As an investor, it is relatively safe to sell coins that have strong technological backing. Find the most negative coin to ensure you maximize your profits when rebuying your coins.
Even so, find coins that have survived various turbulent markets and still survived. Currently, the crypto world has experienced failure with some coins that didn’t survive market crashes.
Select a contract that suits you
In crypto trading, investors can choose to speculate on future asset values even without having ownership of the actual assets. This is done by choosing the following types of contracts; futures, options, swaps, and derivatives. Futures are contracts between two parties where they agree to purchase or sell crypto coins such as ETH at a specified time in the future.
This kind of contract has an expiration date and doesn’t necessarily require traders to have the underlying asset in this case ETH. The agreement can be settled with USD or any other currency agreed upon. Options on the hand don’t have to be settled on an expiration date and can be traded at a predetermined future date. When it comes to swaps, traders are able to keep open positions for as long as they want under certain set conditions.
Understanding how duration and deal size will affect your profit and losses is key in choosing our preferred contract.
Use a take-profit order to lock in profits
Take orders are put in place to specify prices above the purchase price so that traders can lock in profits. Prices above the specified price trigger a sale else no action is taken. This helps limit risk by short-selling your coins at lower profits and exiting the market too soon.
Setting a take-profit order requires analysis of the market trends lest your sale is not executed at all in the end. It’s easy to miss the perfect exit point hence this strategy is best suited to short-term traders.