Trading Strategy: Cryptocurrencies have been around for over a decade. These financial assets are still quite new. Many retail traders approach them carefully and try to focus on spot and P2P trading. Some centralized exchanges started offering various derivatives fairly recently. Options and futures based on various crypto tokens grabbed the interest of many institutional and individual investors, but trading them can be dangerous for inexperienced traders.
Some crypto enthusiasts rightfully believe that automated option trading is slightly safer if you use appropriate risk management techniques and never exceed certain bankroll thresholds. Options have a potential to generate massive profits quickly, but you will need to create a reliable and consistent analytical strategy to ensure that you are successful in the long run.
Trading Strategy:
What are Cryptocurrency Options?
Many CEX platforms offer their clients marginal trading accounts. These are characterized by the ability of retail traders to borrow funds against their balance used as collateral. It means that you can create short market positions by borrowing target assets and buying them at a lower price to then return the loan and pocket the price difference.
Another way of trading with a margin is by using options. These are contracts allowing retail traders to purchase a certain amount of assets at a predetermined time and price. The power of this financial instrument becomes apparent when the market fluctuates heavily allowing you to benefit from price differences without buying and holding assets.
There are two main types of options: futures contracts and binary options. The former are explained above. The latter are considered financial gambling as you receive fixed returns if you make a correct prediction of the price change in the nearest future. The expiration time of binary options can be as short as 5 seconds. These are essentially fancy casinos for people who enjoy chasing quick money and guessing games.
Analyzing the Options Market:
All derivatives, as the name suggests, derive their price from the underlying asset. If you are working with a BTC option, it means that the price is largely determined by the current price of Bitcoin. Since all cryptocurrencies are essentially speculative assets due to the absence of real investments in the blockchain industry (in most cases), you have to use technical analysis approaches to assess market situations.
One of the best platforms to execute technical analysis strategies is TradingView, a contemporary price chart and trading terminal. You can deploy any number of different combinations of technical indicators and graphical tools to build sophisticated analytical systems that will generate alerts (trading signals) that can be used to trigger bots.
Retail traders working with options face many challenges. For example, the market of derivatives works around the clock and is as volatile as the underlying cryptocurrency market. Quick decision-making and the ability to set up market positions immediately protected by delayed orders are quite important for any investor in this sector of the cryptocurrency sector.
Automation is the best way to utilize trading signals from powerful technical analysis trading strategies. Here are some advantages of using bots for option trading:
- Quick Reaction Time: Cryptocurrencies are volatile assets. Prices fluctuate chaotically. Opportunities to enter the market present themselves out of nowhere. A retail trader must be prepared to react and start trading at all times. Humans can have issues with reacting to a trading signal due to stress, distractions, and other issues. Robots never fail to trigger an algorithm when receiving a signal.
- Perfect Execution: A bot is just a script that contains strict instructions. A bot does not “think”. It receives a signal and immediately contacts the CEX exchange to carry out the instructions exactly as they are written by a user. Since bots do not have to deal with the graphical user interface and communicate with an exchange via API, the speed with which they place orders is unmatched by humans.
- 24/7 Trading: Automated trading systems are excellent for the options market. Bots do not need sleep, rest, or time off for eating. They are constantly in the market. The same can be said about your technical analysis strategies deployed to generate signals. Your ATS never stops working allowing it to identify valuable opportunities to initiate a trade even when you peacefully sleep.
- Emotionless Trading: Many humans underperform due to fear, anxiety, tiredness, anger, and greed. These emotions can make even the most efficient analytical strategy useless. Making decisions under the influence of emotions is a sure way to failure. Robots do not have such weaknesses and open market positions decisively without any hesitation. While it can be a disadvantage in some situations, this approach works well in the long run.
Protecting Your Margin Positions:
One of the greatest fears of any retail trader working with derivatives is “margin call”. It occurs when the size of your balance is insufficient to cover your loan. A market position causing this discrepancy is liquidated leaving you without assets or funds. While it is possible to simply add funds to the balance to prevent a margin call, simply terminating a potentially dangerous market position preemptively is a better idea in most cases.
Here are some features offered by the automation provider WunderTrading to help you mitigate some risks associated with margin trading:
- Use Automatic Stop-loss and Take-Profit Features: Bots can place delayed orders immediately after creating a market position. Choosing SL/TP ratios for derivatives can be slightly trickier than for positions on the spot market. You should consider the volatility of the derivative market and account for margin call thresholds.
- Stay within Predetermined Bankroll Limits: It is a good idea to never create market positions bigger than 10% of your total portfolio. In fact, you should use 1% — 2% for any given order when possible. Obviously, it won’t work for smaller portfolios, but the idea is to limit market positions to a size that you will be comfortable losing if a trade goes south.
- Protect Leveraged Positions with Safer Investment Tools: Use DCA or GRID bots to generate smaller profits reliably to continue making money while risking a portion of your capital on leveraged positions. Copy trading, AI-assisted statistical arbitrage, and other tools with moderate risk levels can be also used to hedge against risks associated with margin trading.
It is hugely important to protect all market positions and search for a good balance between risks and rewards. Options trading can be extremely profitable if you find a good analytical approach and focus on defending your portfolio from unnecessary risks.
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Final Words:
Finally, due to the high-stakes nature of bitcoin options trading, sophisticated risk management strategies are required. The market is unpredictable and open around the clock, which presents difficulties for novice traders despite the temptation of fast profits. Automated option trading, made possible by services like TradingView and WunderTrading bots, gives traders a leg up in the market.
In such a fluid environment, bots overcome human limits with their instantaneous responses, dispassionate execution, and ability to trade continuously. Using safer investing tools, setting bankroll limitations, and implementing automatic stop-loss features are critical to protecting margin positions. Prudent risk reduction is still essential for long-term performance in the ever-changing crypto options market.
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