Reversal trading can save you from accumulating bags and endless red positions. Maybe you’ve dabbed in automated trading only to give up when confronted with the brutal nature of the 24/7 crypto markets that can drop at an instant without the safety of circuit breakers. Positions bagging up to -30% are not unusual for low priced low volume coins (which is also why you need to avoid those coins in automated trading strategies).
What is reversal trading?
Reversal trading is a technique to minimize your losses by strategically selling your coins at a loss before they wipe out too much of your investment while at the same time tracking the coin and buying back in when it’s more or less bottomed out to ride it back up to profit or break-even.
If this sounds a little confusing check out the chart below.
1. Buying the coin & reversing the trade
Say you bought a coin during that long wick up (green circle) and the price fell back down. Over time the price turns red and you’re at a 1% loss.
Now you can do 2 things take the loss via a stop-loss or do a reversal trade. With stop-loss, you have a guaranteed loss and if you’re using an automated strategy that gets one stop-loss after another your account will be wiped out overnight!
Reversal trading tries to sell early enough (red circle) in the downward price trend to minimize losses but will keep tabs on the price and buys back as price goes down.
2. Getting break-even
Of course, it’s not easy to buy back at the right moment but that’s what your reversal trading strategy is for. It uses technical analysis indicators to determine the right moment to buy back in (green circle).
Because we sold early we get to the break-even point quickly. Note however, the bigger the drop the more the percentage needs to go up to recover. If the coin drops 50% you need a 100% increase to recover. Keep that in mind.
For more info on this:
Diggin’ a hole & gettin’ rekt?
People often underestimate trading in a bear market. They absorb a loss of let’s say 25% and don’t realize they now…
At this point (blue circle), we have recovered our losses and any gains from this point on are profit.
At the end (above example), we sold our coin for 3.13% profit. If we had done nothing we would have recovered also at least on this chart but with no profit and it would have taken us much longer. And you don’t always get this type of 100% recovery sometimes there’s a small upward correction after which it drops even more in that case getting break-even without reversal trading would be impossible.
As you can see a reversal trading strategy can help you recover from red positions a lot faster and it doesn’t have the risks of direct cost averaging, which can result in your positions getting bigger and bigger locking up all your funds with no certainty of recovery.
Bots that support reversal trading
Both Cryptohopper and 3commas refer to it as “shorting” which is a bit of misnomer as you’re not actually selling coins you borrowed from someone else to refund at a lower cost while profiting from the difference. So be aware that shorting in these bots refers to reversal trading.
Apex calls it “auto-reverse”
The above references an opinion and is for information purposes only. It is not intended to be investment advice and may contain affiliate links. Seek a duly licensed professional for investment advice.
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