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My favorite trading signal: “the Kraken Flash Crash”

What’s up my fellow nerds!

I wanted to take a moment and have a discussion with everyone in this community about leverage. I am sure when you read the headline for this post, you were not expecting me to dive right into one of the more complex nuances of trading, and one that can cause you to loose both your shirt and your pants and your underwear in a market. I am in BY NO MEANS suggesting anyone trade crypto on leverage, in fact this post is exactly WHY YOU SHOULD NEVER TRADE CRYPTO ON LEVERAGE.

In case I wasn’t clear: YOU SHOULD NEVER TRADE CRYPTO ON LEVERAGE. You don’t need it and crypto volatility is big and bad enough to make a fortune without leverage.

We have all heard the disclaimer, and if you haven’t: “leverage can work for you and against you, and it may cause you to loose more than your principle investment“, and there is a good reason all brokers offering any sort of leverage will post this disclaimer.

Leverage is the margin (barrowed) purchase or sale of an underlying asset. The trader deposits X value (could fiat or crypto) and gets additional value to use. Margin has a requirement, a minimum that must be maintained in order to hold a leveraged positions, and failing below a brokers margin requirement WILL RESULT IN YOUR POSITION BEING LIQUIDATED AT YOUR BROKERS DISCRESSION.

Now that we all understand “leverage” and the actions brokers actively take when clients leverage, its time to tie this idea back to how it becomes a trading signal through price action from data feeds from the US based (leverage offering) broker: Kraken.

I personally use Kraken, and I am not endorsing them as a broker, nor is this idea and discussion unique to them… It just so happens its their data feed I use for most my charting, so I am showing how their order booker (data feed we get on a chart comes from the broker you are using order flow through their own unique order book).

Kraken offers leverage, and this makes their order book different than a non-leverage offering brokers feed.

With all that being said, the broker is often times on the other side of a leveraged position; through a business model called a “dealing desk”. This is a perfectly acceptable means of providing a service to clients, but usually means there is some risk somewhere on the other side of the leveraged positions. This forces the broker to take action both when their clients margin runs out, or when there is an overbalance in their book, with clients too heavily weighted in either long (buying on leverage) or short (selling on leverage) positions.

I noticed some irregularities years ago in the Kraken data feeds. There was a tendency for market price action to “dramatically dip further and faster” or “flash crash” at times, and it happened to precede a rather sizable move in ETH at the time. The first time ETH ran from $100 to $400, just before this big rally, Kraken’s ETH price flash crashed to a low of $28. This move lower would have very likely caused most leveraged ETH buyers at the time to go “on call” and be liquidated by Kraken (causing the flash crash), however this sell off in price did not occur on other data feeds (specifically Coinbase below)

Image 1a: ETH Price Feed From Kraken (showing flash crash) https://imgur.com/TF6bTsM

Image 1b: ETH Price Feed from Coinbase https://imgur.com/5DOGFwE

It was as if the Kraken desk removed the liability of leveraged longs on their books, where their dealing desk was likely on the other side of (someone somewhere was). There is always a counter party to a trade.

Now we flash forward to 2021, and unsurprisingly we have had a number of “flash crashes” on the Kraken feed’s yet again; but this time its not just ETH… I notice TRX routinely was doing the same thing:

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ETH Crashes

Image 2a: ETH Price Feed From Kraken 2021 (showing flash crash) https://imgur.com/xYwanCk

Image 2b: ETH Price Feed from Coinbase 2021 https://imgur.com/HvpZXTp

​

TRX Crashes

Image 3a: TRX Price Feed From Kraken (showing 3 x flash crash) https://imgur.com/HGGbaVF

Image 3b: TRX Price Feed from Binance https://imgur.com/q6PS1gR

​

All of these crashes preceded significant upside rallies; rallies which the counter party to these leveraged longs (who would loose while the longs gain) clearly wanted to remove that liability from their books. A flash crash, putting longs on margin call and forcing their liquidation, is exactly how it would be done.

So that friends, is why leverage is a massive risk, and how dealing desk’s can use it against you. It can also be a signal of market sentiment for the rest of us, and it may be signaling the current strength in ETH is only just begun…

Just think, ETH rallied by 4x to $400 highs in just a few months after the first flash crash presented. While the past is never an absolute indication of things to come, the parallels of the 2021 price action (and how the TRX market has already seen such a rally after its flash crashes) shouldn’t be ignored.

Good luck out there.

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23 Comments

  1. When you trade futures on KuCoin, they use a mark price that is an average of multiple exchanges, instead of allowing the ghost finger to liquidate you. I’ve verified the accuracy of that system, and it provides much better protection against flash crashes. Those situations don’t cause liquidation in KC futures because the ENTIRE market has to reflect a similar price.

  2. This is why i dont use a stop loss on Crypto. Its too risky to do so, gains can be gone in seconds while they actually can recover 1 minute later.

    Safest way to go about imo is take profits along the way and place buy orders at low points.

  3. Trading leverage is extremely risky. If you haven’t mastered spot and created a profit on you own (via day trading) you will lose a LOT of money.

    And if you by any chance do leverage trading, never leverage more than 10x at max. Exchanges will flash options like 125x to entice you, but never do it.

  4. Exchanges offering leveraged trading have been doing this for a long time and as long as they can get away with it, I don’t see anything changing unfortunately. I’ve been burned by it as well and now avoid it almost entirely.

  5. Say that one had got into a long position and that the market has risen since.

    One is in profit, and has put stop limit orders above the entry price.

    Is one safe from liquidation?

  6. I don’t think you can use this to forecast the future (it’s not like kraken knows what is in store any better than the rest of us) but it’s still good advice. If you’re betting someone else’s money you better be prepared for the consequences.

  7. Kraken has much lower volume so the huge influx of sellers results in much lower bottoms than other exchanges. If there are not as many buyers, the price keeps going down. Put in super low limit buys in the system and buy the flash crash. I think it might be also related to the CME futures in some way. When the market moves up rapidly… then expect dips back down to where we were 2 or 3 months ago.

  8. You can trade on Kraken Futures, with real leverage and not lose your shirt and not be at risk of a flash crash.

    First, you can only lose the margin in your futures trading wallet, they wont even come after your other exchange assets. They do this by auto liquidating your trade if it goes too far against you, while you have some margin left.

    Second, use the “Mark” price for your close out trigger which removes exposure to wild instant moves in price on a single exchange.

    Third, use very tight stops at inflection points so you lose very small. If trade goes your way then move up exit price for no loss and take profit as you wish, but dont wait long.

    Fourth, dont keep a lot of value in your futures wallet in case of an extreme event and the market leaps past your stop loss.

  9. What you described above is the reason for stoplosses, and if those fail, not having your whole trading balance available (I use 2% to 5% personally).

    “Oh no I got liquidated of 2% of my net worth what will I ever do!?!?!? /s

    …..anyways, *opens next trade*”

    and I regularly use 50x leverage. Your logic is flawed

  10. Is kind of expected that in a bull market the flash crashes will be the lowest point for a few months and Kraken is famous for them.
    Was leverage offered back in 2018?

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