Trading is risky, and trading cryptocurrencies is particularly risky. The profits are naturally proportional to the risk, but so are the losses, and I personally am not convinced that any particular trading strategy can significantly outperform blind chance on average in the market. There is no certainty of any sort in the market - aside from the fact that the price will move up and down, but even there the percentage movements and the order of developments are anyone's guess. Fluctuation farming, my own newborn brainchild, seeks to profit from the only thing which is certain in the market: fluctuation.
How?
A type of modified split-capital hedge strategy. A portion of the target currency is bought at the start, a portion of the source currency is held in reserve. A generous estimate of the probable range of fluctuation is made (Around 50-1000% in either direction). The purchased target currency and the reserve source currency are split into predetermined unit chunks, and each of these will function as an independent, patient, loss-intolerant trader. Sell orders are placed at predetermined sequential percentage price increases (typically 5-20% for cryptocurrencies, depending on the expected volatility), and buy orders are placed at percentage price decreases. Each time an individual order is hit, it is converted into the opposite type of order in the opposite direction. So if the price rises by say, 5%, and the first sell order is hit, the proceeds are immediately used to make a buy order at %5 below that price; if the price drops 5%, and the first buy order is hit, a sell order of what is purchased is immediately made at 5% above that price. Wait. Repeat.
Let's use ETH as an example. Just over a month ago it was trading at around 0.02 BTC. Let's set the range at around 50% up or down, and the trading interval at 5%. A basic fluctuation farm with units of 10 ETH would proceed as follows: Buy 100 ETH at 0.02 (2 BTC). Create sell orders of 10 ETH at 0.021, 0.022, 0.0231, 0.0243 etc. all the way up to 0.0327 (increasing in increments of 5%). Create buy orders of 10 ETH at 0.019, 0.0181, 0.0173, 0.0164 etc. all the way down to 0.0122 (decreasing in increments of 5%).
In the actual graph of the last month, ETH would first hit the 0.021 sell order. This would be converted into a 0.02 buy order, which would be hit a few days later and again turned into a 0.021 sell order, which would be hit almost immediately. Then the 0.022 and 0.023 orders would be hit, and bought back at 0.022 and 0.021 and so on. More recently ETH has been below 0.02 - buy orders would be hit and turned into 5% higher sell orders. At the time of writing I presume that ETH will retrace back up at some stage. Provided ETH does not move below 0.0122 or above 0.0327 for a while, it will be possible to trade, or rather, "farm" profitably.
Every time a unit of 10 ETH is sold and bought back at 5% less, you can choose to keep the 5% profit as 0.5 ETH or 0.06-0.016 BTC, or a mixture of the two. This profit can be used to increase the range - the ETH profit could be set to sell 5% above the current highest sell order, or the BTC profit could be used as a buy order 5% below the current lowest - or to increase the unit size of each trade (so it would become 10.5 and then 11 ETH).
This method has some real limitations:
- If the target currency becomes completely worthless, all the source currency capital will be lost.
- If the target currency becomes next to worthless, trading below the budgeted minimum range, it will be necessary to either assign more source capital for new buy orders, to wait until the price recovers, or to quit at a loss.
- If the target currency trades at the lower end of the expected range, it will take a while for the farming profit to compensate for the drop in value of the target currency bought at the starting price.
- If the target currency trades above the maximum expected range, you will be left with a source currency profit but no target currency.
- Profit is much slower than with ordinary trading. If the target currency goes up by 50% and then retraces back down, the total profit will be something like 10% with this method.
I'm sure there are more.
The advantages of this method are:
- Whenever the market makes a large movement and then retraces, profit is made. With cryptocurrencies, this is quite frequent.
- Provided the price continues to fluctuate within the expected range your break-even price will constantly decrease.
- You are cheering for both teams. No matter what the price does, it will move either towards a profitable sell order or a profitable buy order. This makes watching the market significantly less stressful.
- It would be very simple to program a bot to manage the orders.
More on this method to come in subsequent posts.