How to Safely Short the Crypto Market
Trading

How to Safely Short the Crypto Market

8 months ago

A basic approach to shorting, explained using the recent crash to $42.000.

How to Safely Short the Crypto Market

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When the crypto market looks the way it does right now, many people start wondering how they can do better next time. You ask yourself; “How can I make money off of these crashes?

Shorting the market is one of the more well-known ways of making money while prices are dropping. The timing of this article is perhaps a tad ironic as I was asked to write this just a few days ago, right before the crash to $42,000. I’ll use this crash as a case study.

Anyway! Let us talk about shorting the market. I’m personally of the opinion that shorting is a tool that requires strict risk management, even more so than longs. As you might know, the risk-reward of shorting is asymmetric.

Price can theoretically increase much more than it can go down. This works in your favor when betting on upside, but the opposite is true when you’re betting on downside. Without risk management, you are opening yourself to losing more than you can make, even if the asset you short goes to zero.

With solid risk management, however, shorting is a great tool to add to your arsenal.

Let’s discuss my approach, divided in five phases. These phases are not unique to shorting, but are important in any trade.

  1. The Idea
  2. The Plan
  3. Trade Entry
  4. Monitoring
  5. Trade Exit

Phase 1: The Idea

Any trade starts with an idea. I recommend studying a few different triggers or setups, and really making them your own. This will allow you to recognize certain patterns and act upon them like a second nature.

What these setups are is up to you. My mantra is to be a buyer when market structure is bullish and look to sell in bearish market structure. This sounds simple, but identifying the areas where to buy or sell is where it gets difficult.

For me, this comes down to the market structure and resistance levels. How that works is beyond the scope of this article, but the visual below should give you a pretty good idea. The remainder of this article will refer to this strategy as examples, but the concepts used are universally applicable.

There are plenty of other bases for ideas, such as swing failure patterns (SFPs), news pumps, token unlocks and news. What matters is having a set of concepts mastered and building ideas on those.

From there, find a logical entry and a target, and enter the second phase.

Phase 2: The Plan

For me, a basic plan consists of at least three things: an entry, a target and an invalidation level.

Since we are talking about shorting, we are looking to form a plan to sell crypto and buy it back lower. In the visual earlier, we saw price lose the ∼$59.000 area, and retest it from below. Once price lost the level, a great plan would have been to look for shorts into that area, as we had both a clear bearish structure, and a strong resistance level to sell into.

That’s your entry defined. 1/3rd of the plan done. Next up: where are you wrong? This part is important in trading, but even more so in shorting. Remember asymmetric risk? 

For any trade, you will have to identify a level where you will accept being wrong and take the loss.

In the example I use, a break of market structure does that. When market structure flips to bullish, I do not want to be short, and I will take the loss. By using this stop-loss mechanism, you eliminate the asymmetric risk nature of shorting, and it becomes a meaningful tool.

Finally, you’ll have to decide a target where you are satisfied with the trade, take your profits and run. I personally tend to use “whatever the next obvious support level is.” In this case, the 40-42K area comes to mind.

During the planning stage, you also decide whether you will monitor the trade as it goes, or if you will let it run to either TP (take profit) or SL (stop loss).

There’s your plan. Now obviously, this is easy to outline after the fact. Your job in trading is to find and plan these plays in advance. This takes experience, you can’t read about that.

Phase 3: Trade Entry

On to phase three! The entry. You can complicate this as much as you want, limit or market in, sell in trenches, whatever you like. That’s not really the point. From this point forward, it’s crucial you stick to the plan.

You had an idea, made a plan, and now you may want to chicken out because “it’s going up.” Well, yes, right into your area of interest. Get selling unless you have a strong reason not to. Being scared doesn’t count.

Phase 4: Monitoring (OPTIONAL)

Once you are in a trade, you enter phase 4. I say this one is optional, because this hugely depends on your trading style. I know traders that set and forget successfully, whereas others rely on discretion during a trade to make money.

If you are of the monitoring kind (like me), I personally monitor market structure and price action for clues of a reversal. When this happens, I like to take profits before hitting the target. If these signs never come, I let the trade run to the target outlined in the original plan.

Phase 5: Trade Exit

Because you have a clear plan, you know where your exit will be. Either take profit, stop loss, or somewhere during the monitoring phase. This is where you buy back the coins you sold and conclude the trade. Again, it is important that you stick to the plan here.

I often mess up this part, where I exit a trade way too soon because I fear it will turn around to bite me. This is fine, you live and learn by the trades you take.

Once the trade is closed, don’t look back. It is not unusual for prices to continue falling and to feel FOMO. You made your plan and (hopefully) your money, that’s all that matters. On to the next one.

Conclusion

Shorting is a great tool if you use it correctly. As long as you have a good plan, stick to it and manage your risks, you can safely short the crypto market.

A final note, these are purely my own thoughts and approaches. The above should not be considered or interpreted as advice. Do your due diligence, form your own plans. Good luck.

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