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Tag #Bitcoin

A look at moving averages

Bitcoin recently bounced off its 200-week moving average. What does this mean, and why are MAs important?

 

Moving Averages (MAs) are standard tools used by traders in market analysis. Price moves up and down every second of every day. Moving averages take the last set of prices and average them to ‘smooth’ the signal. For example, a 50-day moving average will take the closing price on each of the last 50 days to give a broad impression of how the market is moving on a timeframe of several weeks. Plotted on a chart, they show a curving line around which spot price oscillates.

 

Shorter-scale MAs are useful for short-term trades, while longer MAs are useful in determining overall trend on the scale or months or even years. Earlier this month, bitcoin touched its 200-week moving average. This is the average of the weekly closing prices for the last four years. It’s a really long-term metric. Think about what is contained within that one number: price data from late 2014, when the last bear market was still under way.

 

The 200-week MA is a helpful tool for investors who make moves based on ‘reversion to the mean’. This is the idea that markets move up and down – sometimes a lot – but will ultimately gravitate back to their historical averages. For bitcoin, it’s not a great strategy, because BTC is so volatile and has previously staged such huge gains. The massive run-up to $20k is lost as mere ‘noise’ for the 200-week MA. However, it’s now one of those rare occasions that we’ve returned to the 200 MA. The last time BTC dropped significantly below the 200 MA was at capitulation back in January 2015 (it tracked along it for a while during the consolidation afterwards). There aren’t many ways of determining ‘fair value’ for BTC, but the long-term moving average is one way traders get gain a high-level picture of the market. In short, we believe that $3,200 is a relatively ‘safe’ price for bitcoin in the medium term. Buying opportunities below that are likely to be short-lived. (Do not take this as trading advice, as ever…)

 

For shorter time periods, other MAs make more sense. The 200-day and 50-day are fairly good indicators for bitcoin, since they remove a lot of noise but give a reasonable indication of the trend. The ‘Death Cross’ we saw back in April – given much publicity by mainstream analysts – did indeed herald further falls. (This is when the shorter-term MA crosses downwards over the longer-term, indicating that selling momentum appears to be building.) However, even this timescale misses a lot of medium-term movement. For day-to-day movements, the 4-hour timeframe is useful.

 

The fewer periods included in the MA, the more impacted it is by recent movements. (Exponential moving averages also give greater weight to more recent data.) That cuts both ways, giving a more responsive signal but ignoring earlier data that might provide useful context. Day traders might use 15-minute candles and MAs with relatively few data points, for example, because they don’t care so much about bigger weekly moves.

In short, there is no ‘right’ or ‘wrong’ MA or time period. They are a flexible indicator that gives useful data about market trend for whatever timescale you want. However, as a lagging indicator, they must be used with caution, since they reflect moves that have already happened.

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Tuesday Inferno market update

It’s set to be a big week, one way or another – and possibly both.

After a move to the downside on Friday, bitcoin has put in a new yearly low just above $3,200. Since then, the price bounced by 10% but failed to make further gains. Instead, it stalled around the $3,600 mark and is now heading back lower. Last week we noted that BTC was in a falling wedge pattern, and it’s now back inside this channel – having dropped out of it and then bounced back but proved unable to escape to the upside.

It is no surprise that $3,600 proved impossible to crack, or that the bounce from $3,200 occurred in the first place. $3,600 was the previous yearly low, and was then established as support; when the price dropped below that level, it became new resistance.

In terms of the sharp moves upwards we’ve seen, these are also to be expected. They are relatively significant price movements, but on low volume, and they fail when they hit resistance. These are absolutely characteristic of a strong bear trend. Shorts pile up and whales love to squeeze them; traders with stop losses set too low find themselves liquidated, the price shoots upwards, and then stalls. Even with such strong bearish sentiment, you will always get reaction rallies, temporary relief, and short squeezes. They are not supported by volume. When a move is decisive, convincing and permanent (or long term), it will be backed up by a massive volume candle: that’s what reversal looks like. These little rallies aren’t even close.

Until such time as that happens, do not be fooled. These short squeezes just set the market up for lower lows, and that’s what we’re expecting to occur in the few days – if not sooner. We’re trending downwards in that channel, and sooner or later it’s going to retest $3,200. If – and we believe when – that breaks, then we’re very likely to see yet another major move to the downside.

We’ve written a few times now about capitulation and where the price may bottom out in this market cycle, but this can only ever be guesswork. Do not believe anyone who says they know for sure. It could be higher or lower than the ‘experts’ state. Price may briefly fall dismayingly low, only to recover just as quickly and leave many traders badly burned. We also cannot know exactly when this will happen. It looks like a large downside move is being set up right now, though this is only based on probabilities: there could be a large move upwards, squeezing all those shorts and destroying a bunch of traders before we head back down. Markets are uncertain and bitcoin is very risky – especially now.

What we do know is that:

  1. The trend is bearish, and recent developments have been even more bearish.
  2. Bitcoin market cycles have historically ended with a bang, not a whimper – both at the top and at the bottom. That ‘capitulation’ move has high probability, just as the parabolic top was likely.
  3. Markets always keep traders guessing in the short term, and none more so than bitcoin.

With that in mind, we’re setting buys at $2,500 down to $2,000, with a skunk order a little lower just in case we can catch a flash-crash or a wick. When the next major move is completed, we’ll be able to evaluate the situation again and update our strategy – and figure out whether the bear market is over or has another stage to go.

TL;DR Do not be fooled by the short squeezes. Do not sleep, or at least try to sleep within four-hourly candles. Do not panic. Tomorrow’s bitcoin millionaires will be made from today’s market crash.

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A study of capitulation

Past performance is not an indication of future performance. On the other hand, those who do not learn from the mistakes of the past are doomed to repeat them. Make of that what you will, but we wanted to take a look at previous capitulation events in the bitcoin market to get some sense of what we might be in for…

This does not constitute financial advice. Trading is risky and trading bitcoin is very risky. Loss of capital, reputation, self-confidence and spouse are likely.

After the stellar rise to $20k a year ago, bitcoin has spent all of 2018 in correction mode. Just as the question in 2017 was ‘Where will this top out?’ the burning question today is ‘Where will this end?!’

You can read plenty of technical analysis that points to support around $3,000, $2,500 and potentially a lot lower. What we’re interested in here is that last, convincing move the market makes to the downside at the end of the bear cycle, shaking out the last of the weak hands in a panic of selling and immediate frenzy of buying when the ultimate low is established: Capitulation.

Put simply, the market heads lower, and lower… and then it all-out dives. Traders are taken by surprise, they exit their positions in utter terror, and then – just as quickly – sentiment turns. Fear becomes greed. The movement reverses, with the chart painting a characteristic ‘V’ shape. The lowest prices never last long, perhaps hours or even less, but those who put their buy orders in the right place profit handsomely. So: where will it start, and how deep will that capitulation dive be?

Where is hard to say, because the price could grind much lower before that final move. Looking at 2015, we did see brief stability and a bounce from around $260 – the top of the previous bubble of April 2013 – before the final drop. That was a 40% move to the downside over 2 days, bottoming at $155, before rapidly reverting and stabilising at prices 30% above that.

For comparison – and it should be made clear this is a meaningless comparison without knowing where the capitulation move would start – if it happened at $3,500 then we’d see the price touch $2,100 before recovering to $2,700.

Capitulation is not so easy to pinpoint for the previous bubble of April 2013. ‘Capitulation’ on that occasion followed directly from the bubble bursting: from the high to the low in that cycle took less than three days. Between 10 and 12 April 2013, BTC topped at $260 and plummeted to below $50, with prices above $100 quickly reached after that. A period between June and August 2013 saw bitcoin trade under $100 for the last time.

On that occasion, the market did revert to its mean: before the bubble, BTC had been steadily rising, and enjoyed a period of stability just below $50 prior to the parabolic rise. That market was, of course, very different, and doesn’t compare easily to today’s market, with a diversity of exchanges and dramatically higher liquidity and volumes of money.

What would a good strategy be this time? That depends on your risk appetite. But we can see a situation where that final fall would line up with support around the $2,000 level. A candle wick might drop a lot lower. Remember, the lowest prices will last only for a very short time, so you’re trying to catch a falling knife. A safer strategy would be to place several orders on the way down. It’s a more mature and liquid market now, so there will likely be more buyers to soak up the panic sells – the same 40% drop is less likely. Shot in the dark? 25-30% final drop. Should that start at $3,000, we’d briefly see around $2k prices. A better approach might be to start perhaps 10% below the lowest price so far, down to 40$, just in case. Good luck!

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Crypto cashout plan

A bear market is the time to prepare your strategy and plan for the future.

It might seem odd, discussing a strategy to cash out your crypto (at a profit) in the middle of a bear market. But now is the time to make plans for the next cycle – which will surely come, sooner or later.

This does not constitute investment advice. It is a suggested strategy for consideration, no more.

The strategy outlined below is not for expert traders who are experienced in calling the market, jumping in at the bottom and exiting with massive profits at the top. This is for regular investors, who are smart enough to buy crypto and hold until prices are significantly higher.

The emotional rollercoaster of the market

Markets have an unsettling effect on investor psychology. In a bull run, it’s tempting to keep holding, because it feels like the price will never drop – it could do another 5x, 10x, 100x even. At the peak of 2017’s bitcoin rally, analysts were calling for $50,000 and $100,000 BTC within a few months. We know how that ended. Similarly, in a bear market, it feels like prices will never turn around, that everything is going to zero. As you’ll appreciate, neither are true. The market can remain irrational longer than you can remain solvent, sure. But trends do not last forever.

So what do you do when the market finally turns around and – having spent months fighting the urge to panic sell (maybe unsuccessfully) – you just can’t bring yourself to sell? Even when a little bit of you knows the party won’t go on forever.

Answer: take emotion out of the equation. Make a plan now. Fix a strategy, commit to it, follow it like a bot. Buy and sell algorithmically, when the price hits points you’ve pre-determined. Here’s an example.

You buy BTC throughout the downtrend, a little every week or month, and probably past capitulation and trend reversal, until BTC is well on its way up again. By the time you’re done buying, your cost basis (the average price you’ve paid) is $5,000 per BTC and you have 3 BTC. Total expenditure: $15k.

You know BTC could rise a lot – A LOT – this bullrun, given its past behaviour. That $100k figure is possible, sure. Equally, you know that nothing is for certain, especially in this sector. So when the price hits $15k, you cash out one of your BTC. You have effectively zeroed your costs (this ignores any capital gains taxes owed), regaining your original investment and still holding two thirds of your BTC. Nice.

What next? BTC continues to head up, correcting here and there, but you have no idea where it will top out. So you decide to sell a percentage every time BTC rises by a given amount. For example, sell 20% of your holdings every time BTC doubles in price. That way, you never sell everything. You don’t get the best price, sure – but not many people call the top and act on it. You do ensure you’re in profit.

At $30k, you sell 20% of your remaining 2 BTC (0.4 BTC) for a total of $12,000.

At $60k, you sell another 20% of what you have left (0.2 x 1.6 = 0.32 BTC) for a total of $19,200.

At $120k, you sell 0.256 BTC for $30,720.

Maybe you also decide this is life-changing capital moment, and you sell another 1 BTC for $120,000, while keeping the rest safe in case the price rises further. Your call. Just don’t act impulsively, and don’t try to jump in and out of the market if you can avoid it. That almost always leads to losses.

BTC tops out at $150,000, and you don’t make any more sells. On the way down, you may like to buy back in at a lower price – but given the dynamics of previous bear markets, you’d be well advised to wait and see where things go, because the price can fall to a fraction of its high.

You can tweak these figures however you want. Sell 10% on a 50% rise, for example. The idea is to ensure you’re never second-guessing the market, and to make sure you’re always in profit. If you have the funds, the foresight and the guts to have bought a long time ago and held, or at a very beneficial price, then taking significant profits using a small percentage of your holdings can be a very smart move.

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$250 million in BTC takes a walk

A huge tranche of bitcoins was moved on Tuesday morning. The origin of the 66,000 BTC tx was an address that had been dormant for over 4 years: https://www.blockchain.com/btc/address/1EBHA1ckUWzNKN7BMfDwGTx6GKEbADUozX

The total value of the BTC was well over $250 million, even at these depressed prices.

The recipient was this address: https://www.blockchain.com/btc/address/1KVAHsKYTGwerk6RSMBotfQMrau26nfwWm. Look what happens: the funds are split into many, many outputs of 660.33 BTC (plus one of 200). What’s the deal?

The 200 BTC then goes to this address: https://www.blockchain.com/btc/address/1FUBESNxB2JkyXPc4o9wwoGt158DC9A8dj. (Interesting prefix, FUBES…)

More interesting is that this address has received multiple deposits of 200 BTC, currently holding 8,000 BTC. And most of the inputs to those transactions are Bech32 pubkey hash prefixes, characteristic of SegWit. FUBES is not.

Curiouser and curiouser.

So a whale moves a massive stack of bitcoin that have sat undisturbed for years. He – or someone else associated in the process – creates a vanity address specifically for the purpose of receiving tranches of 200 BTC. The funds are apparently split into many different addresses, all with the same format, except for one.

It’s pretty weird. Obviously not a simple transfer to an exchange. Maybe a peer-to-peer (OTC) transaction – but it’s not done yet because there are lots of funds left in those one-off addresses. We’re going to have to wait to see how this one resolves. What seems most likely at this point is that the whale is mixing his funds, in a process that has not yet been completed; FUBES in this scenario would be the mixer, and it got paid a very large fee for its work. But even that seems odd; why go to the trouble? Why pay so much? Is this form of mixing really so reliable and safe for such a large quantity of BTC? Mixers pool funds from many addresses, so they only really work if your BTC are a small part of the total amount. 66,000 BTC isn’t a small part of anything. It’s a mystery, and we’ll have to wait for more information before we can deduce more.

FUBES, by the way, has several entries in the Urban Dictionary. The top definition is:

A person, a homie, possibly friend.

Any of you fubes got she [sic] tapes from the Scientology place?

Update:

Another address has also just moved a similar amount of BTC: https://www.blockchain.com/btc/tx/167c5a7c91c908f3159bab679664d8abc06c63bcc0d277a326b609ae360cfb55. The same process is repeated, with funds split between multiple SegWit addresses. Big money is doing its laundry…

In fact, looking at this page: https://blockchair.com/bitcoin we see that there have been many large transactions from old wallets recently. Bitcoin Days Destroyed is something like a measure of Hodler impatience. It multiplies transaction size by the length of time since those coins were last moved. What we’re seeing now is long-term, large hodlers moving coins. Brace yourselves…

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Inferno Tuesday market report

November is over, and it’s been the worst November for bitcoin for many years. Traditionally a bullish month for crypto, this year the trend was too strong to fight. Bitcoin opened November at $6,304 (Bitstamp), and closed it at $3,971 – a 37% fall. Ouch.

Worse still, it doesn’t look like this month saw capitulation. Bitcoin bounced from a low of just under $3,500 – on historic resistance, right as expected – and the last weekly candle was a doji, but it simply lacked the conviction that a reversal needs. BTC failed to push through resistance at $4,300–$4,600, which is what would be expected in a traditional V-shaped recovery. Volumes have improved but are not especially high, and the overall trend has not been invalidated.

Further moves down should not come as a surprise under such circumstances. $3,200 is the immediate target, then $3,000 – and then a long, straight drop to $2,500 if that doesn’t hold. $3k is a significant level, representing an 85% drop from the peak: much the same amount as occurred in the last bear market, through 2014.

Yesterday, we saw resistance in the $3,800 zone tested but – amazingly – hold, with a bounce back above $3,900. It won’t be enough to dissipate bearish momentum, though, unless BTC climbs back above $4k and then that strong resistance zone at $4,300–$4,600. Confidence may be shaken by the news of a huge bitcoin wallet being emptied, sparking fears of a $250 million dump incoming. These stories have to be taken with a pinch of salt and we haven’t had time to look into this one yet; on previous occasions it turns out to have been exchanges moving funds from cold storage, or other benign explanations. Still, it’s not a happy narrative for traders who were already getting itchy fingers.

In all, it’s not a lot of fun for hodlers, but there’s some kind of consensus building that we’re nearing the bottom. We can’t tell when it will happen, but when it does it will be brutal. The best we can say is that it should be over fast and then it’s time to move forward to brighter things.

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Difficulty drops as miners feel the pinch

Bitcoin miners are switching off their rigs as the cost of mining bitcoins outstrips their income. The falling price of BTC means that smaller miners have struggled, and now the results of the crypto recession are filtering through to the underlying infrastructure.

How does Difficulty work?

Bitcoin mining involves computers dedicating processing power or ‘hashrate’ to the network. Collectively, the computers on the Bitcoin network look for the solution to a very specific mathematical problem. The winner of the puzzle gets to add the next block of transactions to the blockchain, and receives a tranche of new coins and transaction fees as their reward.

As more processing power is added to the network, it takes less time to find the answer to the problem. Therefore, Satoshi’s design increases ‘Difficulty’: it makes the problem harder to solve. This means that, on average, it always takes 10 minutes for the entire Bitcoin network to create a new block. Difficulty is adjusted every 2,016 blocks, or around 2 weeks.

Over the long term, Difficulty and price move together: if it is worth mining bitcoin, more people will do it. That’s what we’ve seen over the course of Bitcoin’s history. It has resulted in the evolution of mining from CPUs to GPUs to extremely powerful ASICs. You can see the rising Difficulty since Bitcoin was first launched here: https://www.blockchain.com/en/charts/difficulty?timespan=all

Falling Difficulty shows miners in trouble

It’s rare for Difficulty to fall on each two-week update, and rarer still for it to fall significantly. Miners are forward-thinking and often well capitalised. Many will take the hit in the short term, on the expectation of higher prices to come.

That’s why it’s significant that Difficulty has been falling recently, and has just posted an unprecedented drop. Here and there Difficulty falls a little, but double digits is almost unheard of, especially in recent times.

Of course, this is how it’s supposed to work. Difficulty changes lag price movements as miners react to changing revenues. And through the bull run of 2017 hashrate and Difficulty increased steadily, as miners flocked to the network. The amazing thing is that Difficulty has continued to rise for the whole of this year, apparently topping out in October, even as the price of BTC has slid to just 20% of its peak. But the last couple of weeks, and this last adjustment, have been brutal ‘corrections’ in Difficulty, reflecting miners switching off and packing up en masse – just like traders bailing and getting out of the market.

It might be a coincidence, but the last time Difficulty dropped anything close to this much was just after the capitulation from the last bear market, in January 2015.

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Bitcoin Old Fashioned

An Old Fashioned is the perfect drink for drowning your sorrows in the latter stages of a bear market, or perhaps celebrating your foresight for buying BTC before 2016. It’s refined, calming, and evokes better times, like September 2017 when the price of bitcoin was last toying with this range. Here’s how to make one.

You’re going to need bourbon. Lots of bourbon. If you’ve been hodling since 2016 or before, you might get away with the good stuff like Basil Hayden or Eagle Rare. If not, well, you might have to manage with one of the lesser brands. If you bought BTC in December 2017, you’ll probably just want to use antifreeze or methylated spirits.

Find a suitable glass. Something heavy but not too large. There is an Old Fashioned glass you can buy – a thick, high-quality, rounded glass that feels very pleasing in the hand – and it’s a worthwhile investment if you’ve got the cash. The skull of a permabull will also work if you can find one without a bullet hole in the back, which will leak bourbon onto your trousers. If you bought bitcoin less than a year ago, just go for whatever you can find. A used ashtray is probably about your budget right now.

One sugar lump, or teaspoon of sugar – dark brown, ideally – goes in the glass. Sugar lumps can be acquired for free from bars and coffee shops if needs be. Two or three dashes of Angostura Bitters, or WD40 if you’re strapped. Add a splash of club soda, or tap water if your budget won’t stretch to it.

Muddle the sugar/bitters/soda. Why not use that Ledger you bought back when you thought BTC was going to $100,000 this year? Add ice. Early adopters: ice balls look great and sit neatly in your Old Fashioned Glass. However, you’ll need a special silicon or Aluminium mould for them, so if you’re a laggard who picked up their first BTC at $19k then just chip some ice out of the back of the freezer, assuming you can still pay for your electricity. If not, scour local puddles and ponds under cover of darkness, if it’s winter in your country right now. If not, well, it’s crypto winter everywhere.

Pour over the bourbon, or meths, according to taste and budget. Drink in front of an open fire. Hodlers, that can be in your library, enjoying the comfort of a leather armchair. 2018 buyers, a trash can fire on the street is the best you’re going to do.

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Friday Inferno market update

TL;DR some unexpected action in the markets this week.

Last week closed heavily in the red, with bitcoin plumbing lows beneath $3,500 and looking decidedly as if it was planning on heading lower still. Indicators (and analysts) were predominantly bearish.

Incredibly, though, it didn’t happen. Despite falling volumes and momentum apparently being very much to the downside, BTC put in a double bottom, staged a rally and pushed back above $4,000, taking many traders by surprise. This was not classic capitulation and is, frankly, a curious development.

Bitcoin will encounter significant resistance in the $4,300–$4,600 range, which is where it temporarily topped out on Thursday after pushing above $4,400. This level saw a large amount of activity on the way down ten days ago, and bitcoin paused here in its slide, so this will take some bull pressure to move past. If we do, there’s more around $5,200 and, of course, unprecedented resistance at the $5,700–$6,000 range.

For now, there’s been some respite. Right now, on the weekly, we are seeing a green candle. But the big picture is far from clear, and without that expected final high-volume capitulation the ‘bottom’ lacks conviction. Thus we’d expect to revisit those levels again at some point in the short- to medium-term; the market likes to test these things to make sure. The reversal was lacklustre, so we’re still looking for sustained volume and a decisive move on the back of that before we can call it one way or the other.

As things stand, we’re consolidating in the $4,000-4,300 range, which is positive; there may even be a tentative bull flag forming, in which case we’d look for a push through $4,600 resistance and rapidly above $5k. Alternatively, of course, we’ll break down – at which point lower lows become far more likely.

In short, it’s a very interesting time but we’re not going to shout ‘Moon!’ prematurely. If volume and price both continue to increase, we’ll start to feel more relaxed. It’s more bullish than it’s been for a while, but the bear may have more fight left in him. BTC loves to keep us guessing.

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How to short crypto

Crypto is volatile, and sometimes you know a coin is going to go down – but you don’t have any to sell. Shorting is a way to profit when the market falls.

Disclaimer: crypto is volatile, leverage is dangerous, this is not financial advice, hmmkay?

Buy crypto. Wait for price to rise. Sell crypto. Profit. Simple, right?

But what if crypto is going down? What if you didn’t buy low but still want to sell high? That’s what short selling is for.

When shorting, what’s essentially happening is you’re borrowing coins from someone, selling them, then buying them back lower. Then you return the original coins and pocket the difference. Simple, right?

Of course, if the market goes the other way, you’re going to end up paying more than you sold the coins for. If you borrow a lot, the bill can be high.

That’s why you’ll put down collateral, and if the price moves too hard against you, you’ll be ‘liquidated’ – your position will be closed before your losses exceed the money you have to pay for it. With that in mind, here’s how to short sell. We’ll be using Poloniex as our exchange, though the process is similar elsewhere.

Getting started

You’ll need funds in your account, and you’ll need to transfer some BTC or other crypto to your Margin balance for collateral. Then click on the Margin Trading tab and get started.

Polo offers 250% margin, which means that for every 1 BTC you deposit to your Margin account, you can sell up to 2.5 BTC of the crypto you think is going to fall in value. Be warned: the more of your margin balance you use up, the less the market has to move to liquidate you. It’s worth keeping some in reserve to prevent that. Good risk management is vital if you’re going to be successful.

Pick your crypto from the list of coins including in margin trading. We’ll look at CLAM since it’s been on a bit of a tear recently and we like the odds of it dropping. On the right-hand trading tab, go to Sell CLAM. You can pick a limit price, just like a normal limit order, so if the price rises that high your order automatically opens. Then you select the amount you want to sell, which you’ll note is up to 2.5 times the funding in your margin account. Don’t worry too much about the loan rate – this is the daily rate for borrowing that coin, which will slightly increase your costs and will be included in your open position.

Click Margin Sell, and your position is open – you’ll see it appear on the page below the chart. You can close some or all of it quickly at any time by clicking Close on the right-hand side of the bar.

Alternatively, if you want to wait for the market to fall to a pre-set level before you close out your position, simply open a margin buy order at the price you want to close it, for the same amount. All being well, the two will cancel out when the price drops that far.

There are more ways you can limit your risk, including using a Stop order, but that’s for another time. Meanwhile, happy trading and stay safe!

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