Ejaad-Nama: Money Machine
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Ejaad-Nama is the word from the Urdu language which means Letters of Invention. Ejaad-nama is about improving scientific literacy and normalizing it. By removing the barriers to learning science, we aim to create a community that contributes to society more than just in one meaningful way. You can subscribe here to get the regular update in your inbox:
Readers Special: This week’s Ejaad-nama is contributed by a reader who has been monitoring and trading with cryptocurrencies. He shares his experience of trading with cryptos.
Building A Money Machine - Written by Muhammad Ahad Rafiq
Bitcoin - A digital currency
Historically, Gold and Silver have been used as a form of payment and replaced the barter system of the dark ages. Gold and silver are noncorrosive materials and can be formed and stamped into coins. They derived their intrinsic value from the rarity they had but also the shiny looking appeal it got. In Modern days, The government-issued currency was also backed by these physical commodities.
However, in modern time, the fiat currencies such as the US Dollar and Euro is not backed up by the gold and silver. They derive their value from the Government that issues it and the trust of buyer and seller.
Bitcoin, like Fiat currencies, is a digital currency that derives its value from the network of users that trust in its exchange. There are plenty of simplified explanations of bitcoin. I like this one. Bitcoin started a decade ago from a mysterious white paper that discusses the problem with the current currencies and how it could be simplified by removing the central authorities. Since then it has evolved into a trillion-dollar industry which has seen volatility like no other industry.
My Journey with Bitcoin
I had personally never traded or invested in stock till 2017 until I heard about bitcoin in the last week of November-2017. I did my first trade in December 2017 with the most important Trading rule:
Only invest what you can afford to lose.
Like any hype-buying amateur, I was in profit within the first 10 days and heavy loss within the first 20 days. The worst part is while I was in profit, I convinced 6 to 7 more people to invest in the crypto world. The bad experience did not stop me from investing more in crypto. I knew the problem: I was just going by my guts. I never thought of developing a system behind trading. The naivety was the hope that one day I would wake up and my crypto coins are hatched. I am a millionaire now (I still dream of this, I know you do too).
In the next 2 years, I tried to understand the basics of trading and develop a system that helps me trade. I will focus on this newsletter, the tools I used to develop that system. However, how to go about that system can be very individual as I learned from my mistake earlier I made with my friends.
Stock matter is a form of Deterministic Chaos
Chaos theory is a branch of mathematics that studies chaos. Edward Lorenz, in 1961, while trying to recreate old weather sequences based on a computer model noticed that rounding the numbers from 6 digits to 3 digits, changed the whole prediction pattern. He was then able to prove how small insignificant factors can have a big impact. He summarized the theory:
Chaos: When the present determines the future, but the approximate present does not approximately determine the future.
Stock Markets, both traditional and crypto, function in a similar fashion. It has both a systematic component but also a random one. Hence, your predictions, no matter how well studied can only be true to a certain extent. Factors such as natural disasters (COVID -19) or the emotion of the people (Gamestop shares) can cause huge fluctuations in the market.
The Systematic part of the stock market involves learning a lot of technical indicators and skills to read a graph. This was a good starting point for me.
Magic Toolchain
The knowledge of technical indicators can be implemented in such a way that you don’t have to look at price charts of any cryptocurrency all the time and be anxious about your profit and loss. This process will free you from the emotional stress you go through every time you decide to open a trade. We basically need to connect 3 components.
Strategy Alert Generator: A place that can automatically and continuously monitor price charts and generate alerts for your strategy. The strategy could be based on a complex mixture of indicators, e.g. relative strength index (RSI) together with moving average convergence or divergence (MACD), or it could be as simple as monitoring the price continuously e.g. if bitcoin price drops below 30,000 USD, generate a “buy” alert.
Bot: It will do your trading on your behalf with your desired settings e.g. how much portion of your total investment to use in each trade when the buy alert is generated etc. Similarly, it sells your coins based on your sell alerts and keeps a track of your profit/loss.
Exchange: Like the famous New York Stock Exchange (NYSE) where you can deposit/withdraw money and then buy/sell cryptocurrency with it except there is no broker involved in between. Also, unlike traditional stock exchanges, crypto exchanges are operating 24/7.
For each of the above step, we require cloud-based services which can work continuously and luckily, we already have free versions of all these required services.
Strategy Alert Generator: TradingView
This is the first most important tool you need. Trading view is a cloud-based web-software that is pulling billions of points of data every second of stocks and cryptocurrencies. As a free member, you can open any stock or cryptocurrency chart and look at their current prices and historical data ranging from per second data to higher time frames like months. It provides an extensive built-in and public library of indicators, which can help you determine the next move in price.
Again, to understand those indicators you need to read about them and learn their usage.
Based on your set condition, you can set an alert on TradingView and whenever your conditions are met, an alert message can be generated which you can receive on your email, telegram messenger, or could be sent directly to your bot.
Another crucial feature is the pine coding language of TradingView, embedded inside browser-based software. Pine is specifically designed for trading purposes and is quite quick to learn if you already have programming experience.
Whatever you draw on price charts can also be coded in pine language. Here you can build your “strategies” based on your favorite indicators and generate alerts. Imagine sitting on a couch while watching a movie and receiving a telegram message that you need to invest now! Simple right? But irritating? Who wants to pause a movie and shift the brain from entertainment to price charts within seconds? We need a bot!
Bot:Zignaly
Zignaly is currently a free bot with an extremely easy to understand interface. It will receive your strategy alert from TradingView and based on predefined settings of the investment portfolio, it will buy a cryptocurrency on the exchange. This all takes place within a second. No need to even pause your movie.
Exchange: Binance
Binance is the world’s largest cryptocurrency exchange performing millions of transactions every second. It has a dedicated wallet for each of your crypto coins and you can trade on a single coin or many coins at a time. To open an account on Binance is quite easy and free of cost. Basic verification steps are needed which can be done within a couple of minutes via phone and you have your account on Binance to deposit your money just like online banking. Crypto exchanges just like normal banks are extremely secure and follow proper regulations.
Success Story
THIS IS NOT A FINANCIAL ADVICE: It took me many months to come up with some strategies which could adopt the automation path. There is a lot to discover and learn but this system of mine has started to give me a profit of more than 10% of my investment each month for the last 3 months. Now, that is a huge booster for me as it beats the average stock market return of about 10% per year. Consistency in profits along with the compounding effect can be a game-changer for anyone within a year whether you are a day trader or a long-term investor. Following is the monthly profit indication via zignaly bot.
You can also set a loss percentage monitor via bot which will not let your investment decrease beyond your tolerable limits while you are asleep. A lot of experimentation still needs to be done with the aforementioned web-services to achieve profit with consistency and to make overall automation more seamless. Risk/Reward ratio can be minimized by continuous improvement in strategies.
Nutshell
As e-commerce has disrupted the whole online-earning models, the crypto market is nothing short in terms of profit gains due to everyday volatility and institutional acceptance. The Automated trading system provides some outright benefits:
I have completely removed the emotional and gut reactions from the decisions.
The trading system is a clone of me(I hope!). It’s trading for me when I am sleeping or occupied.
Analysis can be performed on a wide variety of indicators and quicker.
If you have any questions, drop your comments below or let me know if you would like to know more.
If you would like to send in your projects and hacks to be part of the newsletter, please do comment below, or email me: a.nadeem89@gmail.com. Leave your feedback in the comments about the content. and subscribe here, and share the newsletter with your friend.