One Trade is Legion
The Grind is not about a single trade. It is about stacking both buy and sell orders in a series of trades in order to profit off the spread while helping the market maintain liquidity.
This is quite a different view of markets than taken by the average trader. It is less like trading and more like farming. You are developing a niche market in which you are interested enough to continually work it over the course of years in an attempt to grow the value of your holding in each of the two assets.
Is it better than just holding? For most people, probably not. Will it make you feel like a superhuman trader? Not at all.
The Strategy
How does the Grind work?
- Choose a trading pair
- Decide on your level of investment
- Determine your spread
- Determine the entry price levels
- Schedule the entry of Depth and Time Orders
- Set a maintenance schedule
- Set goals
Stage Zero, identifying a market with a somewhat stable base, paired with something that is going to exceed it in long term growth. This is the ever-important pre-trade development stage which determines where to point the rest of the trading machine.
For me Stellar Lumens, XLM, is my base asset as their DEX makes it easy to trade from anywhere in the world using a cheap smartphone and for almost no fees. After that, I look for high liquidity markets, something with a consistently high daily volume. Choosing the one you are most familiar with, and which you think will either outperform or underperform XLM is a good place to start.
For instance, if you think Ethereum will outperform Stellar Lumens, growing at a slightly higher rate because of its DeFi, then you could trade the ETH anchor available on the Stellar DEX. Or if you simply think that Stellar lumens are going to outperform the US Dollar or the Euro, you can trade these pairs using an anchor as well. And all of those examples have a high volume of daily liquidity on the DEX.
Hopefully, more currencies will be anchored in the future offering Forex traders a highly liquid, low fee environment in which to trade. Trading interfaces could be developed with this specialty purpose in mind, but that’s beyond the scope of this training manual.
Once you have determined your pair and decided how much exposure you are willing to risk in your market making endeavor, it is time to move onto Stage One, Market Development.
Stage One (Market Development) of market making is accumulating inventory and getting the break-even price below the current price. This might mean buying and selling on smaller margins in the beginning as you get familiar with the system.
I say developing the market because you have to care enough about that one asset pair to spend all your time with it. This isn’t hopping from one trade to the next or always looking for the next big thing. This is providing liquidity for a single asset pair. It takes a risk of capital and a continued effort. There are no immediate gains. You have to look for the long term development of the underlying assets, not just for the week or the month, but for years to come. How far into the future of these assets can you look? How much do you know about each of them and the market forces which determine their price?
Stage Two (Auto Pilot) means that you are intimately familiar with your system and schedule, and that you are above the break-even price and working from zero exposure. Margins can be adjusted slightly wider to offset the reduced trading levels. But at this point, you are emotionally detached from the market making decisions that go on behind each trade. This allows you to make smarter choices and to spot opportunities more easily.
Stage Three (Accumulation) would be accumulation, using the 98/5 strategy, and is completely optional.
But how do you begin to develop a market?
The Spreadsheet
The Spreadsheet is your main tool in tracking Exposure, Inventory and the current Break Even price. You only have to input two numbers, besides the date, for the spreadsheet to track everything else. A Purchase or Sell Price, and the Amount, bought or sold, which I call Units. The sheet calculates everything else.
Using the bottom of the Mobi spreadsheet as an example, you can see Date, and Purchase Price or Sell Price are filled in. I used two color-coded columns because it was easier for me to calculate in my head that way. This is something I do on the fly, so having it that way on the sheet just makes sense for me. Another person could probably do it a lot smarter. Someone who knows how to work spreadsheets. Lol.
Units are of course how much of the underlying digital asset I am buying or selling. These are closed orders, not open orders. Each Asset pair has its own spreadsheet, which is on a separate tab.
The Total is automatically calculated by the value of the Purchase or the Sell multiplied by the Unit amount. In the case of a sell order that is a negative amount since it is leaving my wallet, and thus the effect on Total is up or down depending on the operation. The Total is also my exposure. This means that a positive number is to be understood as having paid Lumens out of the balance of the wallet for this transaction.
At the bottom of the Units and Total columns are cumulative totals that reflect the outcome of every transaction to date. The Shave account or the 98/5 system is not about living or dying on one or two trades. It is about grinding out an overall cumulative advantage in the market place by providing liquidity and being aware of the true underlying asset value. Short term Price speculation is not the point. Major trends are where the opportunity exists, and understanding those trends grow the account.
There are also averages at the bottom of both the purchase and sale columns, but these are not weighted for transaction volume. There is also a notation for the difference between the two to perhaps understand volatility and how that works towards profitability, but it is mostly an arbitrary addition at this point.
And that was the whole of the spreadsheet until I added the other calculations today which I think are much more informative.
Before I get to that, the number at the bottom of the Total column is my exposure, in this case, Lumens. If it is a positive number I still have Lumens at risk. If it is a negative number then I am working from earned capital. The color behind this cell will change depending on the current value. The number in green below the asset or Unit total is the price I would need to get for the accumulated tokens to break even. When this hits a negative number I am less concerned. In fact, when it continually runs below the current Order Price I am happy as this means my accumulated assets have been purchased cheaper than the prevailing market understands their value.
That’s the heart of the thing. The long term grind which builds this cushion of accumulated assets at a lower price than the market would ever hope to sell them for.
But that’s the old story.
How does it work?
After that core data, we have a split in the sheet. The rest of the data is to help you understand where you are at with any single asset pair. Because, as I said, a trader is not judged on any single trade outcome, but by the overall cumulative results of their trading. Their ability to spot trends and profit from them. And for me, compounding is the way to ensure that success. But you can read more about that in the details of my absolutely useless guide to the 98/5.
On Hand, Exposure, Break Even, Price, Cushion and Potential are the remaining data columns.
These are running calculations to help better understand where your series of trades stand. Sort of like a Dollar Cost Average Calculator, but potentially much more. (And that may be all in my head.)
On Hand is a running calculation of how much unsold inventory I have in my account. I would think that, and perhaps even the rest should be self-explanatory, but I will detail them just in case.
Exposure is my total expense outflow, in this case, represented as Lumens, because that is the base currency of the account. Not money per se, that’s a whole other discussion.
Break Even is the price I would have to sell my accumulated assets, as represented by the On Hand or Unit Total amount, in order to return the initial outlay of my base asset. The idea is to get this to a negative number, meaning that even if the valuation of the underlying asset goes to zero I will still be in a decent position. Anything more than zero, as long as it is below the current market price, is a bonus.
This brings me to the Price, Cushion and Potential.
The Price isn’t the current market price, it is only the last price this account bought or sold an asset at. I have no idea how to integrate outside prices into a spreadsheet, and I would think it would be highly distracting. For now. It is easy enough to calculate from my most recent transactions and make a judgment whether or not a specific asset is worth trading.
The Cushion is the difference between the most recent Price and my Break Even point. This tells me how much leeway I have in selling any one asset. And is invaluable over the old system of 98/5 where I would stick orders and forget about them. For instance, I still have one of my oldest sell orders on Stellar, an RMT sell order @ .069 XLM, which I keep as a sort of memento from before RMT dropped to its current levels… That’s the sort of Cost Averaging idea incorporated into the mix which allows me to leave prices where I put them, and yet also be able to modify them later while understanding my overall profitability without thinking I have taken a loss when in reality it was a win.
Potential is merely the return if I liquidated all of my On Hand assets at the most recent price to eradicate any outstanding amount in the Running Total.
To me, it is fairly simplistic.
At a glance, I can see how each asset performs, how much it has returned, and what kind of exposure I have to each. Which sounds like a lot, or not much, depending on how you look at it.
Stage One – Market Development
Once you have determined a market you have to begin developing the market. This is Stage One.
How to Determine Spread
What kind of volatility exists in your market? How often do you want to be trading? (Assuming you are doing this by hand, like me, doing battle with robots.) A trade or two every day? A trade a week?
Assuming a purchase order of 200 XLM in value, you could put this same 200 XLM up for sale at 5% above the purchase price, or you could put two sell orders for 100 XLM each at 5% and 10%, giving you an average spread of 7.5%, or you could go further and break it down for 50 XLM @ 3%, 5%, 10%, and 20%, for a 9.5% total return or spread.
Your spread will be determined by the angle of your market trend.
The spread is up to you. And it can change over time. It doesn’t have to be set in stone. If you find you aren’t getting enough action, then you can lower the spread or break each purchase order up into several sell orders. If the market is moving slowly sideways, keep your spread tight and the number of sell orders to a minimum. If the market is in a steep incline, raise your spread, perhaps even across a series of sell orders higher than you normally might think possible. Again, depending on your market, but 10% and 20% spreads could be possible, though most likely for a short time.
It comes down to what’s personally manageable for you. If sitting in front of the computer or staring at your phone every day for hours at a time is something you find enjoyable, the 3% spreads will get you more action on a regular basis. If this is something you want to manage once, maybe twice a week, then 5% or 10% spreads will give you more time in between trades.
Just remember, since you are not taking your base asset out, the market making system compounds your returns. This means that the number of trades can be more important than the return from individual trades.
What gives you a better return? 3% every day, or 10% once a week? 3% once a week, or 10% once a month?
It may not seem like much over shorter time frames, but over longer periods of time, the difference is massive. Do the math and you’ll see why Albert Einstein referred to compound interest as the eighth wonder of the world.
How to Determine Exposure
Determine the amount of your primary asset that you want to lose. Yes, lose. Not risk. Once you commit this asset you will not be able to retrieve it for at least a year or more. This is a long term commitment to grind out an advantage in the market.
The point isn’t to try and catch sudden moves and cash out. The point is to be in the market every day. To live in the market the way you might go to a workplace, clock in and deal with customers. Your only job is to be a market maker. And the money in your trading account is your tuition. The entrance fee for learning the in’s and outs, not only of this system but of the underlying assets themselves.
Divide your total Exposure in half. One half goes towards Time Orders, the other towards Depth Orders.
Depth Orders
The Depth Order amount is divided equally among buy orders staged below the current market price where the first purchase is made.
Starting with a 4,000 XLM balance in a wallet, 2,000 XLM stays there for Time Orders, untouched, while the rest is broken up into ten 200 XLM buy orders representing your price depth.
The first purchase order is at the current market asking price, the rest are staggered every 5% below. So if you bought @ 100 as the current market price, you would also place buy orders at 95, 90, 85, 80 and so on until you used the rest of the 2,000 XLM set aside for the Depth Orders.
Doesn’t that, buying an asset down to a 50% price reduction, contradict the very smart idea of never adding to your losses?
You have to think of the entire amount deposited in the wallet, the 4,000 XLM in the above example, as a single trade. It is lost. It is a losing trade until you can make it otherwise or your time runs out. In which case you will be dead, so why worry about it?
The first market order, which was purchased at the current market asking price, is immediately put up for sale using your predetermined spread.
And then you wait.
If the price moves down your Depth Orders automatically buy more of the chosen asset as your purchase order is already in place. You immediately put that up for sale at your spread. There is no stop loss. The money in the account is money you are comfortable running down to zero. You can afford to be patient not only because you have written it off, but also because you have no expectation of a return anytime soon. A year from now is not today. There is no pressure in the trade. Stick to the system. Buy all the way down to the bottom of your predetermined depth.
In the above case, you are buying down to almost half the price of the asset’s current market value. Hopefully, you are not that wrong in your assessment of the direction of the market, but it isn’t that important. Buying on the schedule you planned all the way down and putting those orders up for sale at the level of your spread is what is important. Forget everything else.
Eventually, the market will move in your favor, even if it is a brief pause in the downward price action, and you will fill some sell orders. The proceeds of which go towards the immediate purchase of assets at the market price or new purchase orders just below the current market price.
And the process is repeated.
Purchase order gets filled, then a sell order goes up at your spread.
Eventually, the market will start to trend in your favor if you are correct in your future price estimates. Knowing everything you can about the two underlying assets is critical, but when the market starts to turn in your favor, and you see that you are making headway above your break-even price,
Meanwhile, those unfilled purchase orders that you set at your lower levels are left in place. They are a sort of buy cushion just in case the market turns sharply against you just when you have started to move your Time Orders into the mix.
Time Orders
Half of your primary asset goes towards Time Orders. Similar to the Depth Orders this amount is equally divided, except instead of purchasing at a specific price, they are used to enter the market on a specific date.
For instance, the 2,000 XLM is divided equally into 200 XLM amounts scheduled to be done weekly. This would give you two and a half months of cost averaging.
It can also be spread over larger amounts of time, and the asset does not have to be used for purchases at the current market price but can be used to establish purchase orders slightly below the current price if that is something you think is prudent.
The Time Orders are for cost averaging into an asset. Even if many of your Depth Orders never get touched.
Tools
Switching back and forth between charts and using a multitude of indicators is not conducive to being a focused and successful trader. Especially when you are trading from your cell phone.
I currently limit myself to three indicators that determine the level of investment at any one time into any particular market. Before this, even before using a spreadsheet, I didn’t use any indicators at all and merely went with the automated market making system which I calculated in my head. The point is not to overcomplicate your trading. The market-making process has no big wins and will not feel exciting except in retrospect, so making it any harder than it needs to be will most likely cause you to quit long before you have fully implemented and executed it properly.
That being said, the three indicators I have found useful, and all of which can be utilized in the free version of TradingView, are the 180-Day Moving Average, the 90-Day Exponential Moving Average, and the Money Flow Index, also known as MFI.
Using these three indicators I only ever look at a daily chart. I am looking for the larger trends and am unconcerned about shorter-term price movements. While the Moving Average and the Exponential Moving Average should be fairly self-explanatory or familiar to most traders, the MFI might need a little more explanation as it is at the heart of entering trades.
The Money Flow Index or MFI is a lot like the Relative Strength Index (RSI) that many traders use, but which incorporates volume into the calculation. It is set to a length of 14, with overbought being 75 and oversold being 25.
How it is used is that the MA and EMA, set at 180 and 90 respectively on the daily chart, are used to determine the overall market trend. The MFI displays fluctuations in this trend, and in my hypothesis, buying and selling opportunities.
When used with the market making system a set amount is used for purchase orders. Since management of assets is your priority this should be a small percentage of your entire holdings. As we discussed previously you should have a set amount that you are willing to risk, and which is listed as Exposure on your market making spreadsheet.
Let’s say for simplicity’s sake that your expected Exposure is 5,000 XLM, then 100 XLM is 2%, and a decent purchase order size. This may not seem exciting at all, but it’s not supposed to be.
Starting at the top of the MFI, anytime the Money Flow Index is in overbought territory, i.e., above 75, no purchases will take place. When the MFI is between 60 and 75, purchase orders of 50% will take place, meaning that the purchase size is 50% of your normal trade size. So if your planned purchase size is 100 XLM then you’d only put in a buy order for 50 XLM according to your schedule. It is only when the MFI is between 40 and 60 that you are purchasing at your 100 XLM level.
Below 40, going down to the oversold level at 25, you can increase your purchase size by 50%, meaning orders of up to 150 XLM. Anything below 25 and you can double your purchase order size up to 200 XLM.
This is by no means a guaranteed method to build inventory for an easy payoff. The larger trend is your best indicator. Knowing ahead of time how much Exposure you are willing to take and sticking to your purchase schedule is an integral part of this market making system.
There will be times when you run out of funds while the MFI remains in oversold territory, and you will want to kick yourself when it bounces back up and you missed out on a few decent trades.
Likewise, you will miss out on some periods of growth when the MFI remains in the overbought territory as your inventory is quickly sold off and you are left on the sidelines for the price move.
These are the consequences of playing it safe and working for steady returns versus getting overly excited about one large percentage win. Because if you are thinking of it in terms of winning then you should probably go back to gambling.
Stage Two – Auto Pilot
Stage Two begins when you are consistently trading above the Break Even Price. You are not profitable simply because the Current Price is above your Break Even Price. You are not profitable simply because your Potential Value is a positive number. This system is not profitable on individual trades. You are not considered profitable until your Exposure is a negative number. But that might be hundreds of trades away, especially if you just entered a market and are trying to acquire inventory. Because that’s all it comes down to, inventory management. You want more of the asset when the price is going up and less of the asset when it is going down or remaining stable.
This is where you refine your maintenance schedule. Everything should be running according to preset rules. There is no second-guessing what the next move should be, there is no research needed other than keeping up with news related to your chosen assets.
If a purchase is made it is immediately put up for sale at your spread price.
The only complication to this is if the current price spikes up through all of your sell orders. You are immediately confronted with the question of whether or not you should buy back in or wait for a dip in price. This is something you should determine in your plan.
A standard sized trade amount means that you can take those multiple sales and spread them, either into Time Orders, Depth Orders, or a combination of the two. A patient measured approach is better than jumping all in at one price level only to find out you have bought at the peak of the market.
You may miss some opportunity in price spikes taking the slow measured approach, but you are in this for the long haul. There will always be another time to trade. As long as you can stay in the market and not get washed out by risking too much at any one time.
If the current price does the opposite and spikes down below your Break Even price, then you simply start all over again from there. Your Depth Orders capturing some of the downward movement, your Time orders coming into play at those levels in the future, unless you have exhausted both of those already.
Stage Three – Accumulation
Accumulation. Using it to fund the next market or to improve your return.
Once your Market Making Trade is profitable, meaning that your Exposure is a solid negative number without fear of it dipping back into positive territory, you might consider accumulating the underlying asset for long term holding beyond the spread trades.
Instead of doing this through outright purchases, consider using a 98/5 trading approach. 98/5, simply put, means purchasing at your standard price and size just as you always do, but instead of putting the whole purchase up at your spread price, you put 98% of the purchase up for sale at a minimum of a 5% increase in price. This gives you a 2.9% return which limits the compounding growth of your trading account if your usual spread is above that, but it means that you now have 2% of your underlying asset not locked up in any single trade.
Over time this 2% can add up, especially if you have been consistently growing your account. There are no calculations required to figure out what has been accumulated as anything else would automatically have been put in sell orders. This means that anything available in your account is the Accumulation.
Placing sell orders would be a simple calculation of Purchase Amount multiplied by .98 to determine how much you would put up for sale at your spread price, which is calculated as usual.
This makes it easy to manage, even if you are doing your trades on your phone and keeping track of everything in your head like I often do.
These accumulated assets can be held for the long term or sold in other markets, either to create a Market Making Spread Trade there or to use those acquired assets to create a secondary market.
For instance, let’s say that I trade BTC/XLM in my main Market Making Trade. If I accumulated excess BTC not locked in spread trades I could use this in an ETH/BTC market, or I could use the BTC to purchase ETH to use in an ETH/XLM market.
Or you could simply hold it in reserve for selling during what you think are price spike opportunities. One way to automate this is to regularly place the accumulated asset into sell orders well above what you would normally expect from your spread.
In that case, the time factor comes into play, and this is why it is not suggested early in the trade development stage where the volume of trades is more important than higher returns.
Stage Three is not a requirement, it is an option.
Exit Strategy
The idea that the investment is lost from the very beginning softens the idea of an exit strategy. You’ll liquidate as you need it. You’ll manage inventory and decisions as you go. Sticking to your schedule and refusing to dip into other savings or altering the plan unless regular additions were scheduled in.
For instance, with the 4,000 XLM account above I would make the plan to get that in the market exactly as described, but that I would also be adding 1,000 XLM a month for four months to help it get started. This 1,000 XLM could be used in a variety of ways. To extend the period of cost averaging into the market, or to buy larger amounts at the current price level, or even to set purchase orders below the current price, which would be adjustable, unlike the scheduled ones set at the beginning which always remain in place until the end of your scheduled exit, or until the market has far exceeded your expectations.
Summary
This is a long-term trading strategy that can be done on your phone from anywhere in the world using Stellar. Some people choose to play games on their phones in their spare time, I chose to work this system to accumulate digital assets.
It is not for everyone.
It is a grind.
And none of this is financial advice.