In the last part, we understood how a market is highly manipulated at times and how and why the bullish and bearish market operates. We also learned about the Spoofing and the Stop-hunting market strategies.
In continuation of the Basics of Market manipulation– Part I, let’s here try to figure out some of the widely used techniques and terminology employed by the market makers and manipulators.
What is a Slippage?
Slippage happens when you buy or sell an asset, and you get a different average rate than expected. This occurs because there is a discrepancy in the price between the time you enter the trade and the time the trade is made.
The discrepancy is because there is not enough volume at a certain price to fulfil the whole order.
Example: You decide to market sell 10 BTC at $7,800. However, there are not enough buyers for 10 BTC at $7,800. Instead, there are buyers for 2 BTC at $7,800, 2 BTC at $7,600 and 6 BTC at $7,000. Therefore, you sold 10 BTC for $72,800 in total. This
is an average price of $7,280 per BTC, which is $5,200 less than expected.
Note: Just keep in mind that if you market buy/sell there is a high chance of not getting the price you see on your screen especially for the low-cap, low-volume trading coins.
What are futures contracts?
A futures contract is an agreement between two different parties to trade an asset
on a specific future date at a specified price.
After entering into futures contracts agreement, at the contract execution date, both parties have to buy and sell at the agreed-upon specified price., irrespective of the actual market price. Futures are used not only for profit-making but are also used to hedge the risk of price volatility. Futures contracts are traded on an intermediate futures exchange.
Example: Let’s say diesel is trading at $2 per gallon currently, a national road transport agency expects the diesel’s price to rise, therefore, buys a four-month futures contract for 10,000 gallons at current prices. The contract is, therefore, worth $20,000 in total. If in four months, when the contract expires, the price of one gallon of diesel is $3, the road transport agency saved $10,000 in actual!
What is a hedge?
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. In simple language, a hedge is a risk management
technique used to reduce any substantial losses or gains suffered by an individual or an organisation. Hedging is analogous to subscribing an insurance policy. If you own a house
in an earthquake-prone area, you will want to protect that asset from the risk of its damage if the earthquake hits the house severely – to hedge it, in other words – by subscribing earthquake insurance. There is a trade-off between risk & reward, by hedging, it reduces potential risk & also chips away at potential gains. The monthly payment burden, and if the earthquake never comes, the policyholder receives no pay-out. Still, we’ll prefer having our homes insured in case of an earthquake-prone area to be prepared from the risk of a disaster.
Example: Let’s say you hold 5 BTC and nothing else. You are expecting the price of Bitcoin to drop. To hedge the risk and protect your portfolio you can open a short position. By doing so, you diminish the potential overall loss caused by a drop in Bitcoin’s
price. If you prove wrong and the price of Bitcoin increases, you will lose on your short position, and you will give up a portion of your gain. Hedging could be considered as an insurance against the price movement of Bitcoin.