Under the Hood: Crypto Market Risk Factors
Technical series showcasing the core elements of Tradingbay Algorithms
There are 4 total Risk Factor systems which help traders make better investment decisions by avoiding risk, understanding the current market conditions for optimal strategy selection and exiting positions before its too late. The following use cases provide examples of what to expect.
#1 RETRACEMENT
The RETRACEMENT system is ideal for any trend trader looking for optimal market entries into already established trends. RETRACEMENT can provide strong utility for doubling up on already profitable positions when trends are expected to continue. RETRACEMENT can also assist scalping based trades as additional confirmation or a day trader looking to benefit from a strong market move but does not want to risk leaving the position running on for too long.
As seen in the example above, during a strong trend, RETRACEMENT is ideal for trading pullbacks and for doubling up positions. In this example a trader could have either added a new position in each wave of the market from [X] -> [B] or following the SAFE EXIT system to take profit from the trend trade then get back into the trade at each confirmation layer.
- [X] A strong trend breakout with supporting systems also agreeing on the BULLISH sentiment enters our trade.
- [A] We notice several RETRACEMENT systems alerting the trader that a pullback is expected allowing us the opportunity to re-enter an additional long position as our existing trade from [X] is still in profit.
- [B] Soon after we notice 3 additional RETRACEMENT systems also confirm a BULLISH reading while the entire time our trend systems continue showing a BULLISH state allowing a further trade opportunity to jump into this current trend.
This example above is only the tip of the ice berg. We can pair this set up with HARMONICS and other systems to further increase our trading success finding more entry zones and furthering our analytics in this time period.
#2 STABILITY
STABILITY is a direction based multi-purpose market risk profiling tool. In simple terms, a STABLE reading provides traders a good validation point that markets are expected to continue in their current trajectory with minimal deviation. This of course is not a fail proof system, like anything else however its accuracy is excellent when combined with other systems to validate trade entries or when paying particular attention to CAUTION/UNSTABLE periods for trade management purposes.
In addition to aiding in market entries, the tool can also be used for strategy selection. STABLE environments tend to favour trend based trading strategies whilst CAUTION & UNSTABLE readings are good for reversal or scalping based trades.
USE CASE: TREND TRADING
One of the best uses for STABILITY is using it for trend trading purposes as a confirmation tool. It would be highly recommended to enter trends when market conditions are STABLE as seen in the example above. We loaded up all 24 available assets for STABILITY. We notice 3 points where all or almost all systems agree on the STABILITY bias. Each of these 3 points would be ideal trend re-entries if other trend systems also agree on the BULLISH sentiment. During the time before the continued pump, it is clear that STABILITY found a consolidation zone in its earliest moment.
TRADING STRATEGY SELECTION & REVERSAL CONFIRMATION
When market conditions are not STABLE, it is ideal to consider a reversal trade depending on the output from the rest of the systems. As you can see price was falling in this period then we had majority of the STABILITY systems provide a CAUTION or UNSTABLE state for a short period of time before returning to STABLE for the majority. Keep in mind STABILITY is not a trading signal but instead a warning type of indicator. For this reason, you do not always need ALL systems to agree on the bias but instead focus on the majority. If over 80% of the systems agree on state x then that would be good enough to take action.
In this example, the trader would be preparing for a reversal trade and would execute it during that period of instability if other REVERSAL systems agree. Alternatively the trader may opt in for a trend trade (which is the safer option) once STABILITY has returned to STABLE for the majority + TRENDS based systems agree.
In addition to the above tips — another way you can optimize STABILITY is to figure out which combination of assets work well for the chosen currency you are trading. You can further increase your accuracy and get fast feedback this way. An ideal way is to have at least 12+ systems measuring STABILITY included inside your analytics stack.
#3 WARNING
In contrast to STABILITY, WARNING is a none directional market noise indicator meaning it focuses at smaller time-frames and assess the risk profile of the current bar. Traders can use WARNING as an additional layer of risk assessments for currently open positions or when considering entering the market. It is often accurate for avoiding problematic areas in the market where there is too much or not enough volatility alongside erratic price action.
USE CASE: REVERSAL TRADE PROTECTION
A view of XLM/USD shows us multiple problematic zones that could avoid traders from being put in bad spots.
- [A] Selling action not recommended as a fake-out has been detected and caught correctly.
- [B] Lack of momentum and poor price action stability.
- [C] During the TRENDS breakout, WARNING was normal however the market moved too fast and price action indicated a possible reversal. Selling in this zone would not be ideal as pointed out by WARNING. Once the state was normal and all other indicators are showing the BEARISH state alongside STABILITY showing STABLE, it would have been a good time to enter. The result is a better entry price plus avoiding market volatility while taking the same exact trade you had in mind during this period, all made possible using the WARNING system.
- [D] This spot is not as useful as the others in the scenario in relation to timing good market entries because traders should already be in the market at this point. The use case for this spot is paying attention to what could have happened in this zone and adjusting your stops in any case to safeguard some profits from the selling action in case markets reverse.
USE CASE: TREND TRADE PROTECTION
In this trending scenario on ADA/USD, we notice several points in time where entering the market in either BUY or SELL direction would not be optimal.
- [A] This is the classic spot where a lot of novice traders may attempt to buy into the market as a sudden stronger spike took place only to find themselves being stopped out early. This type of scenario can easily be avoided by paying attention to Risk Factor systems.
- [B] Very similar to point [A], this zone shows us some indecision in the markets. Certain traders may have sold in this zone since higher highs were not established, markets stalled and then started to fall.
- [C] Due to lack of movement by the asset, we have another WARNING indication, this time backed up with decreasing volumes.
- [D] This zone protects traders from considering a sell due to the temporary market pullback. It is also useful in these spots of pullback to pair with RETRACEMENT and enter positions which have supported directions from multiple systems and WARNING has shifted to a normal state.
#4 SAFE EXIT
SAFE EXIT is a easy to use automatic exit strategy under any circumstance. The tool will emulate possible directions the market will take and provide the safest exit based on the most dominant active short term direction. This does not mean the most optimal exit for your current position (since the system will not know when you entered) however in most cases it is able to find dips in market movements which should be used as a caution and in some cases complete market reversals.
Beginners should aim to use SAFE EXIT as much as possible. Even if you end up closing your position early, if the direction of the market continues going in the same direction, you can always reopen the trade and accumulate additional profit.
HOW TO USE
EOS/USD example of how SAFE EXIT saves traders from both sides of reversal & trend trading capturing two points of reversal exits and one BULL TP from the entire upside move right before trends broke downside.
Here is a example on XMR/USD trend based exits which captured both sides of the market with high accuracy. All signals are easy to use and presented in a single integrated chart.
This example on LTC/USD shows usability for timing market reversals accurately and capturing correct top and bottoms of the market.
PUTTING IT ALL TOGETHER
Risk factors are a critical part of the ecosystem for traders of any levels. You do not need any trading or coding experience to use any of the tools shown above. All algorithms are drag and drop. Simple color codes are used throughout all systems which anyone can follow. Capturing good entry points is only half the equation in becoming a profitable trader long term.
If you struggle with leaving trades on for too long and end up crushing your profit or simply get wrecked from market volatility despite being right about your prediction, Risk Factors can help distinguish a good signal from a bad one and can also be paired with other trading systems or strategies that you are using right now.
Learn more: https://tradingbay.io
Break the Simulation.
