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Basic knowledge of short selling, how to win even in the falling market of virtual currency


In cryptocurrency trading, many people buy coins when the price goes down and speculate on the plan to hold them for a long time in anticipation of the price rise. However, in the trading of financial products, even if the price drops, it is possible to aim for profit by short selling (short). Therefore, in this article, we will explain how to win in the down market using shorts.

What is short selling of financial assets?

Similar to stocks and Forex, in virtual currency trading, there is an ordering method called “sell (short)” as opposed to “buy (long)” in which you own coins (in-kind). However, a short is not just a sale of the assets you own in kind, but a contract to place a sell order based on your own margin held by your account and then buy it back later. Here, we will explain the market price suitable for shorts and explain the basic knowledge about how to aim for profits.

Bull market and bear market

First of all, the market price of financial instruments including virtual currencies can be divided into two main markets: bull market and bear market. The bull market (bull market) means that the price of financial products rises, and the ordering method is said to be “long” because it lasts for a long time. On the contrary, the bear market (bare market) refers to the situation where prices are declining and is named “short” because it is shorter than the bull market. If both the medium-term and long-term axes are on a downward trend, it may be judged as a bear market.

Aim for profit even in bear market

Even in a bear market, you can not only see when the price will rise, but also aim for profit. That is a short order. As mentioned above, it is possible to borrow a certain amount of virtual currency by depositing margin in the account. Then, by buying back when the amount drops to a certain amount, the difference will be profitable.

For example, when the market price is 1 BTC = 6 million yen, it will be short-circuited at the rate of 1 BTC. By buying back when 1BTC = 5 million yen drops, it is possible to get the difference of 1 million yen as a profit. In other words, you can aim for profits not only in the bull market but also in the bear market by taking advantage of the shorts.

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Characteristics of margin (leverage) trading

Many people think that cryptocurrency trading cannot make a big profit unless it has enough money. However, in leveraged trading, it is possible to trade with the funds of the account as collateral for many times the amount. Here, we will explain the features of leveraged trading and how to use it correctly.

What is leveraged trading?

Leverage is like the “leverage principle”, and it is possible to handle a large amount of money with a small amount of money. For example, if you prepare 100,000 yen and double the leverage, you can trade the same amount of coins as the one who prepared 200,000 yen. In other words, by raising the limit of funds that can be handled, you can aim for more profit than usual. However, as a risk of leveraged trading, if you lose the transaction, the amount of loss will be larger than usual, so you should be careful when using it.

Also, in the cryptocurrency market, you can leverage both long and short methods.

Leverage and trade in a short period of time

In the financial markets, leveraged trading tends to be used more for short-term trading, mainly for short-term trading, than for long-term holdings.

While the profit is long with a blue ceiling, the short can only aim for profit in the range from the current price to 0. In other words, you can expect a return that is many times or tens of times that of the assets you traded in the long, but you can expect a return of up to twice in the short.

However, by taking advantage of leveraged trading, you can make many times more profit even with shorts. If it is short, it will inevitably be a short-term transaction, so you should avoid the act of leaving the position held. This makes it easier to be aware of the loss cut line that you have set at the same time as price fluctuations.

In addition, because it is easy to involve a loss cut in a long position, the price movement speed is faster in the down market than in the up market, and it is also characterized by excellent time efficiency.

How to use as a risk hedge

If you do not want to profit (sell) long-term longs due to various reasons such as tax generation timing, you can also use shorts as a risk hedge for physical transactions.

As mentioned above, during physical transactions (long), holding is a standard for a long period of time, so even if the market enters a down market, the position will not be settled. You will continue to hold your position until you reach your goal.

However, just looking at the down market is nothing more than a loss of opportunity (missing a chance to make a profit). You can make a profit and offset the loss by shorting while you are making a loss in the physical transaction. It is recommended to aim for profit by making the best use of both long and short instead of either one.

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Risk of shorts to watch out for

So far, we have explained “short” as a method for aiming for profit in a declining market. However, it is necessary to keep in mind that shorts require more market price determination than longs, and there is a high risk of melting their own funds.

The aim is the adjustment phase after the sharp rise

In a market with a strong sense of overheating, it is ideal to aim for the timing when the short cover soars (the upper beard of the candlestick), but aiming for the timing when it has risen completely is difficult and risky unless you are a professional on the road. It will be higher.

A relatively solid method is to short-circuit with the aim of returning sales in the “adjustment phase”. The adjustment phase refers to the decline that accompanies profit-taking behavior that comes after a price hike.

In financial markets, the prices of financial instruments do not always rise, even if they are rising. One of the theories in the market is to gain momentum (fall) several times and gradually rise. Moreover, the sharper the rise, the greater the decline as a price action.

First of all, carefully observe the market price and try to enter with an awareness of the points with high superiority without rushing.

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Loss in short

In the short, when the price rises, a loss will be incurred according to the margin. Since the exchange executes a compulsory loss cut (compulsory settlement system), the loss can be suppressed up to the balance of the account, but it still melts a lot of own assets.

To avoid the above risks, we recommend entry using “Stop order”. Stop order is to set a loss cut line in advance before holding a position and settle automatically when the price is reached. Stop orders will allow you to minimize losses.

, It is difficult for non-professional traders to always stick to the market, so by setting a stop price, profits and loss cuts will be settled automatically even during work or bedtime. It should be noted that when the market price changes suddenly, it may slip more than the value of the order.

If you want to trade margin (leverage), what is the recommended exchange?

Margin (leverage) trading is now possible on most exchanges. Finally, I will explain the recommended exchanges after distinguishing between Bitcoin trading and Altcoin trading.

Recommended for Bitcoin trading

For Bitcoin trading, we recommend two exchanges, “bitFlyer” and “TAOTAO”.

bitFlyer is the largest cryptocurrency exchange in Japan. Its strengths are that various fees are free and that you can start trading from 100 yen, which makes it easy for beginners to use. Only 12 currencies are available for regular transactions, and only Bitcoin (BTC) is available for leveraged transactions. With up to twice the leverage and limits, even beginners can trade with confidence.

TAOTAO is one of the exchanges licensed by the Financial Services Agency in the crypto asset exchange business. Not only are there no fees, but we are also focusing on security, so users can use the service with peace of mind. Leverage trading is possible in the following 5 currencies.

Also, with Bitcoin, the minimum handling unit is 0.001 BTC (1 BTC = 6 million yen: about 6,000 yen), so it is recommended for those who want to start with a small amount of funds.

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Recommended for altcoin trading

In altcoin trading, “GMO coin” is recommended for beginners. GMO Coin handles the largest number of currencies in Japan and can be traded 24 hours a day, 365 days a year, making it a highly versatile exchange. The currencies that can be handled in leveraged transactions are the same as the 5 currencies mentioned above. In addition, since both positions can be built, it is possible to place sell orders as a risk hedge for physical transactions.

Be aware that you will not lose in virtual currency transactions

In conclusion, the most important thing to be aware of in order to win in cryptocurrency trading is to control all risks such as “money management” as much as possible in all transactions and to consider how to lose. As with the stock market, if you don’t skip your own money and “exit” from the market, you’ll have many big opportunities.

Shorts are difficult for beginners and may not be easy to do. However, keep in mind that there is a means of shorting as a means of aiming for profit and risk hedging not only in the rising market but also in the falling market.


Author: M.Atsuta

Images used under Shutterstock license
“Cryptocurrency” means “cryptographic assets”

Disclaimer - OBN is an informational website which aims to give the latest blockchain related news to the readers. Articles on OBN should not be considered as investment advice. Trading cryptocurrencies is a high-risk investment, every user is advised to consult an expert before making any decisions.