Shorting Memecoins - Avoiding The Number 1 Mistake
Feeding Frenzy
Just as everyone jumps on the bandwagon of a mooning memecoin, there are also those waiting to ride it down in a short position. For those unfamiliar with shorting, It’s basically a typical “BUY” order in reverse. Simply put, the trade becomes profitable once the price begins to drop from the point of entry. Thus, we have a “LONG” position, which is, in essence, the same as purchasing tokens and waiting for them to appreciate, and we have a “SHORT”, which is the aforementioned process in reverse.
There are numerous “tools” traders utilize in order to identify a potential trade. However, when it comes to shorting, resistance levels tend to be a fairly reliable indicator. That being said, one should never enter a trade without further confluence. However, in regard to memecoins, it is often a little difficult, due to a lack of available data. This is primarily due to the token not having any measurable “history”.
Even if there is a fair amount of history, the sudden explosion in price tends to nullify the previous price action. This is one of the reasons many become casualties trying to short memecoins. They begin guessing where the top is instead of making use of a rather simple element of technical analysis, which I will elaborate on shortly. In order to open a short position with confidence, a trader has to allow the pump to mature and play out.
Key Resistance Levels
Unfortunately, due to the nature of memecoins, traders have to make use of lower time frames. The example I am going to be expounding upon is on the 4-hour chart, which is not too low, and allows for a decent trading range. Because memecoin traders are generally avoiding previous price action, they tend to do the same, in relation to the current price action. However, the sudden movements are creating data that can actually be utilized, unlike the previous price action.
What traders often tend to do is reason that the token has rallied too far, and interpret a short-term correction as the top. This behavior would often occur in a scenario similar to that of number 3 in the graph above. Inexperienced traders would consider this to be a reversal. However, the key mistake here, is that this is only a retracement. Ideally, you want to see a double rejection. This does not necessarily have to be a double top formation.
Referring to the graph above, the rejection at number 1 looks similar to the rejection at number 3. However, it is followed by another rejection at number 2. So, what we have here is the creation of a resistance level. You can clearly see that after the correction at number 3, the price action later breaks through that level where it was previously rejected. In other words, the appropriate entry for a short trade would be just after the rejection at number 2.
Traders who went short at number 3 would have been liquidated. However, adhering to the technique I have just explained would have protected traders from entering a short position prematurely. Don’t be deceived into thinking that you are going to miss out. Waiting for the applicable conditions provides a trade opportunity that has a very high likelihood of being successful.
The screenshot above reveals and points out a trade opportunity of approximately 27%, which becomes even more significant thanks to leverage. A trader using 10X leverage here would have secured a 270% return, provided they were not too greedy, and exited the trade.
Final Thoughts
Effective trading requires patience, as well as the practical application of knowledge. Over time this becomes a skill. The key here is to allow the pump to mature, while simultaneously viewing the progress on multiple time frames while you wait for a key rejection… not a retracement! That’s it for this one, catch you next time!
Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.
Nice