My favorite trading signal: “the Kraken Flash Crash”

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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)

Image 1b: ETH Price Feed from Coinbase

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:

ETH Crashes

Image 2a: ETH Price Feed From Kraken 2021 (showing flash crash)

Image 2b: ETH Price Feed from Coinbase 2021

TRX Crashes

Image 3a: TRX Price Feed From Kraken (showing 3 x flash crash)

Image 3b: TRX Price Feed from Binance

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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