This is a continuation of the posts describing how I designed a Bitcoin trading campaign (Post 1 in the Bitcoin series) and the early warning signs of intermediate trend exhaustion (Post 2 in the Bitcoin series). Prices had been falling for several days in a row now, as shown in Figure 1. However, there was no real reason to panic. Prices had been rising on shallow daily pullbacks for months, and a deeper retracement was only to be expected. Furthermore, at that stage, the pullback size was reminiscent of a recent one involving a volatility shake, also shown in Figure 1.
Figure 1: Bitcoin Pre-plunge
As one might point out in hindsight, we could have terminated the trading campaign then. However, as the average trading campaign price was favourable relative to where it was, a decision was made to hold out in case the trend resumed with a roar, without allowing for a proper re-entry. This is a balancing act which traders tend to get confused about, due to it not having been accounted for in the trading plan.
I was now watching with some interest, looking for some signs of a trend resumption. However, prices were also coming down to the pre-determined exit level. On 22nd December 2017, during the early hours of the Asian trading session, our rules forced an exit at an average price of approximately 14200. (See Figure 2 below.) The return on the entire trading campaign, based on maximum capital risked at any point, was a little over 100%. It certainly wasn’t the several hundred or thousand percent gain that others experienced, but it was done with extremely controlled risk. I consider it a satisfactory campaign.
Figure 2: The Bitcoin Trade Exit
I wish to point out that the exit was taken in the upper third of the day’s range, prior to the madness of the plunge. If there had been hesitation in the execution of stop losses, the situation could have turned ugly very quickly, as prices dropped to the 11000 region.
Ultimately, prices did bounce up from the low near the end of the day, and some might wonder if it would have been wiser to stay in. I think not. Staying would have meant a potentially uncontrolled loss. No one knew that a bounce would occur, although, as I have pointed out, the fact that I had been anticipating another opportunity to scale into the trade should tell the reader that I was still bullish.
Was there a re-entry? Yes. Did I take it? No. Why? I did not feel like making bad decisions just after a successful trading campaign, and had no intention of wrecking Christmas. Nonetheless, if you wish to read about the trade setup that was not taken, it is over here.
Head Trader Consultant