Trading Column `The Writing on the Wall´ - The Art of Buying the Dip

While I’m writing this article, the bitcoin price is crashing, but by the time you read this, it’s entirely possible that it already recovered to some extent. If you didn’t buy the dip, this article is for you.

The Why

GDAX BTCUSD trading volume 18-22 Dec 2017: 236,880 BTC

CME Bitcoin Futures trading volume 18-22 Dec 2017: 6236 = 31,180 BTC

Both the CBOE and the CME launched bitcoin futures during the past two weeks, which have been trading at unsurprisingly low initial volumes. My theory for this particular dip, as I’ve detailed in several previous posts, is that owing to the futures launch, there is no longer any investable allure of “getting in before Wall Street” anymore. However, I’m still bullish on bitcoin long-term. As for the CBOE and CME futures, there’s still plenty of time to get in before the accessibility of these instruments improves. As such, this dip presents an excellent opportunity to engage oneself in what has all but turned into a mantra in the bitcoin trading class of 2017; buy the dip.

Bitcoin has "crashed" 30% SIX TIMES in 2017. Each "crash" has been followed by an increase of: 76%, 237%, 183%, 165%, 152%. Bitcoin takes 7 steps forward, 2 steps back, 7 steps forward, 2 steps back. Every 2 steps back is heralded as the end of #bitcoin. Relax! pic.twitter.com/bV5ZFeucTp — Robert Reid (@robertreidmd) December 22, 2017

The How

One thing I struggled with as a novice trader buying my first dips was the fact that I didn’t always have fiat on exchanges to buy the dip with. Many times, I was already in BTC, and if I were to wire more fiat to the exchanges, the dip would oftentimes already have disappeared before the transfer completed. That meant that to buy the dip, I would also have to somehow succeed at selling the top. That was until I learned that you could buy the dip with the BTC you already have, using leverage on derivatives exchanges or exchanges that provide margin trading. For this article, I’ll write from the perspective of BitMEX trading, as this is the exchange which I am currently conducting my dip-buying activities on.

Here are the things you’ll need to be a successful BitMEX dip-buyer:

A BitMEX account funded with a portion of your BTC

Basic knowledge of the BitMEX platform

A plan

Good nerves

Discipline

A BitMEX account funded with a portion of your BTC

One of the best things with high-leverage exchanges is that you can enter very large positions using only a small portion of your stash. This means you’ll be exposed to a much smaller custodial risk compared to when you’re trading on spot exchanges. Personally, I keep 90% of my BTC in cold storage and 10% on BitMEX solely for dip-buying purposes.

Basic knowledge of the BitMEX platform

The best way to get started with BitMEX is to use the BitMEX testnet. This allows you to trade with some fake bitcoin to get a feeling of how to use the interface and how the different order types work.

Before you start trading with real, large amounts I recommend that you read the info pages carefully and make sure you can explain what the following means: automatic liquidation, auto-deleveraging, difference between entry price and mark price, the BitMEX swap funding model and what the meaning of “inverse” is in “XBTUSD inverse perpetual swap”.

A plan, good nerves, discipline

Everyone who is not trading is a good trader. It’s very easy to look at the charts and imagine when you would have bought and when you would have sold. It’s much harder when it’s real. The best way to handle that is to have a plan that you simply follow. You should have an idea of the price you want to buy in at and the price you want to close your position at; both a price you’ll take profit at, and a price you’ll cut your losses at.

As you hone your dip-buying abilities, you’ll notice that your performance correlates with your ability to not get caught up in the heat of the moment while executing your strategy.

The When

Some people believe that the fastest price movement in bitcoin is when it crashes. There’s even a saying: “Bitcoin takes the stairs up and the elevator down”. But there is one movement that is faster than the crash, and that is the bounce. In moments of true desperation, the price can fall thousands of dollars over the course of minutes. But on the bounce the order book is cleared out, so the price can jump back the same amount in a matter of seconds. That is why when you buy the dip, you do it on the way down, not on the way up.

This means that you have to make a guess at where you think the bottom is. Here’s a selection of tools bitcoin traders commonly use to guess bottoms:

Technical analysis (TA) indicators such as RSI and MACD

TA patterns such as inverse H&S, double/triple bottoms

Fibonacci lines

Trend lines

Previous support levels

A few years ago, I backtested every TA indicator I could think of without finding very convincing results. I use a different strategy which is completely unscientific, but seems to work well for me. Here’s what I do:

Seeing as hodling is a perfectly fine strategy for bitcoin speculation, there is really no need to buy the dip unless the dip is too good to pass up. Therefore, I only buy dips if I think the price drop is really exaggerated. So I imagine a price point which would feel really brutal, wiping out several weeks or months of gains, and then some.

The second thing I do is watch the price drop in real time. During a crash, there’s going to be a point when there’ll be a red candle on the 5-minute chart that just keeps growing and growing. On BitMEX, you’ll see red numbers in the order book showing up; these are other traders’ automatic liquidations being triggered. I’ll also take a look into chat rooms and trading subreddits and make sure that everyone is talking about the crash. Lastly, I’ll monitor the notifications on my phone and wait for my brother to ask me if bitcoin is dying and if he should sell. At the point of maximum pain and desperation – that’s when I buy the dip.

Sizing: I usually use 10x leverage on BitMEX, which gives me headroom for another 10% price decrease after I’ve bought before I get automatically liquidated myself. I do not enter with my whole trading balance at once. I usually enter with 20-25% initially and keep increasing as we go down, depending on how intense the desperation feels.

Warning: The last few weeks the BitMEX trading engine hasn’t been able to cope with the trading volumes and will sometimes not accept orders during critical moments.

Do you agree buying the dip is a succesful trading strategy? Let us know in the comments below.

Images via Shutterstock

Disclaimer: Bitcoin price articles and markets updates are intended for informational purposes only and should not to be considered as trading advice. Neither Bitcoin.com nor the author is responsible for any losses or gains, as the ultimate decision to conduct a trade is made by the reader. Always remember that only those in possession of the private keys are in control of the “money.”