(+) Why do Markets Like Bitcoin & Ethereum Violently Correct?

I was asked a question recently about what causes markets to correct so violently. While the answer to this question is obvious to all seasoned traders, I thought I’d spend a few minutes answering it for those who are relatively new to this arena.

There are several reasons, but there are a few that stand out as the most compelling.  The first is paper profits.  At the start of every major bull move there are many people who bought early.  As the markets reward them for their buying decision they are increasingly happy (of course).  But they understand that their ‘profits’ are only on paper until they sell. They realize that if the market falls back to where it began, their windfall will be gone, if not reversed to a loss.  It puts them in a conundrum because they all want to sell the top, but where is the top?  Every trader has an ever-increasing anxiety as their position grows in value.  With each uptick they have more to lose.  Everyone wants to be the first to sell, but they don’t want to panic and sell too soon.  It is nerve-wracking.  Those who were long Ripple last night were in this position.  That is for sure.

When there is a red candle each trader must make a decision, and there comes a time when many people decide, at the same time, to lock in their profits, and the way they do this is to sell.  The initial selling puts fear in the hearts of those who were brave just a moment earlier, and the selling soon takes on a life of its own. Eventually, prices reach a point where other traders decide they want to buy at that price, and the selling is overcome by new buying.

The next reason is stop losses.  Most traders use stop losses which close their position if the market moves against them.  It is a wise practice, but it often results in positions being closed at the worst possible time.  Selling at the low, or buying at the top. (I hate that, but I wold rather suffer a rash of such aggravating losses than be wiped out in a single market event.)

There are a slew of cunning traders out there with the market power to ‘run the stops’ .  They know that after a huge move there are a ton of stops out there, and they can pretty well guess where they are. By looking at the chart they can see where most people put their stops.  They know that if they can start a reversal and cause it to move far enough to trigger the stops, a chain reaction will ensue, causing the market to move sharply in reverse.  Before they begin the process these traders put in buy orders ( or sell orders, depending on market direction) at the low they expect will be hit.

I can’t prove it of course, but I am reasonably sure that the ETH massacre last month at $52 was just such an affair.  It was ruthless and financially devastating to many traders.  It may seem unfair to newbies, but this business is a knife fight, and there are no rules in a knife fight.

The last major reason is margin calls.  I advise new traders to NOT use leverage.  Only trade what your account allows you to buy or sell. Leverage is awesome when you are on the right side of a trade, but quite cruel when you are not.  Also, it forces you to sell in a panic, even when you don’t want to.

If you are using leverage you cannot wait out the violent swings.  A friend of mine bought ETH at the $21 high and still had them at $6, because he did not buy them using leverage.  I’m sure it was painful to the extreme to hold them, but he believed they would eventually go up again.  As of yesterday he was up more than 5x!! His patience was amply rewarded.  If he had used leverage, he would have been left with a significant loss when the inevitable margin calls were issued.

I usually do not trade with leverage, though on occasion I will.  I simply hate the added pressure of margin calls.  There is enough pressure in this business without that headache.  But, opinions differ on this point.

Here is a brief look at the major coins as of this morning:

Bitcoin

I still think Bitcoin is over-extended and ripe for a fall. I would close any long positions I had here.

Ripple

XRP is still a buy here.  I suspect .20 is in the cards in the next few weeks.

Litecoin

Litecoin is a buy with a target of $30, then $36 if $30 yields.

Ethereum

Ethereum is a buy here. I have a feeling that $150 is on the horizon.

ETC

ETC is a hold until it clears the $7.5 high.  If it does that, it could double to $15.

ZECUSD

ZEC is a buy. It could go to $140.

XMR

Monero is a buy. It could go to $40.

REP DASH

These two are a hold.  They have resistance to get through before they can make significant gains again.

Remember:  The author is a trader who is subject to all manner of error in judgement.  Do your own research, and be prepared to take full responsibility for your own trades.