Data that matters

Article on data that actually matters in trading.

Remember

Once again, I find myself writing another article on what I think is pretty important. In fact, trading starts with data—data converted into visual charts, data converted into funky visuals to trigger an emotional response, and colors designed to divert you from what really matters: managing your risk. Yes, that's right, you are not here to make money; you are here to provide liquidity to some Yale-qualified quant originally from 佛山 (Foshan). Not only is he working with a billion-dollar balance sheet, but he is also supporting his entire family back in his home country each paycheck.

Meanwhile, you log in to Bybit and find yourself some shitcoins to make "life-changing" gains, right? Wait... did you forget this is an actual business for the privileged?

Binance, founded on September 3rd, 2017, headquarters: unknown. Made a net profit of $8.8 million in its first year of operations, and $850 million the year after. That's an increase of 9550% in under one year.

What data matters?

Once you accept that your trade platform revenue doesn't stop at simple transactions but involves much more, you can come to terms with the fact that you have a significant disadvantage as a manual trader. With PinoAPI, we have some knowledge to share to help you go from 0-6 to 0-1 in trading futures. However, you are still at a disadvantage because you simply pay transaction fees for the risk you are about to take. That's the hand you are dealt, and there's no avoiding it.

Chinese Fishing Nets by Chitra Vaidya

So?

In conclusion, you are at a disadvantage all the time while being exposed through any centralized trading platform, simply by its nature. However, there are a few metrics you can measure to use to your advantage. This way, you could go from 0-1 towards even or even 1-0. Let's not forget that the majority still starts at 0-6, emptying their pockets to the exchange, liquidity providers, and... you.

The metrics

• Volume

• Long/Short Ratio

• Funding Rates

Volume

Now, if you ask any wannabe parent's basement trader about indicators, it is very likely they will end up talking some gibberish about volume. Volume as an indicator alone is as useless as trying to learn Wyckoff in one day (if you know, you know) or Smart Money Concepts (no pun intended).

Example

No pun intended, it can be that easy!

When trading volume is low and declining, it indicates there's little interest in trading a specific instrument. This means the trading platform generates less revenue from handling transactions.

However, your trading platform aims to purchase more Lamborghinis and daily dim sum dinner parties.

This is where leverage becomes relevant, as it provides a way to still generate revenue. Don't expect a single exchange to move Bitcoin's price alone; such movements are usually coordinated and require a significant amount (shit-ton) of capital to influence major prices. When this happens, it can cause cascades of liquidations, resulting in numerous transactions with extra taker fees multiplied by leverage! $$$$$$...

Now, you might think, "If volume is low, why not just avoid that specific instrument?" You are exactly right!

However, this is easier said than done. Once you make money in a liquid and volatile market, you want to see the same results every day. So, when the market is slow, illiquid, and barely moving, you ramp up the leverage to achieve the same gains on smaller percentage moves. Let me tell you, your trading platform loves that!

How can I use this to my advantage?

First of all, it differs per instrument. Some newly listed altcoins are very illiquid and easily manipulated. I wouldn't recommend anyone trade those, not even with PinoAPI. Instruments like Bitcoin, Ethereum, or Solana, for example, require much more liquidity to move around, making them a better pick. When volume dries up, you could start to look for levels where people are likely to get liquidated. These levels are very likely to be taken out once manipulation occurs. In strong trends, the manipulation is often in the opposite direction.

Compression (Usually low-volume) followed by manipulation towards Buyside/Sell side Liquidity (Liquidation clusters).

How to recognize low-volume?

Usually, low-volume periods are paired with slow and sideways price action on major cryptocurrencies like Bitcoin. With altcoins, they often come with grinding price action in one direction (up or down). One of the measurements, other than the volume indicator, is daily trading volume. All trading platforms show you exactly how much of the instrument you are looking at is traded. If it is a lot lower than the day prior, you could conclude it is a low-volume day, which could then result in manipulation later.

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Long/Short Ratio

In this age of information, numerous sites (like Coinglass) provide insights into trading platform data. Of course, more advanced traders are aware of dark pools and OTC trading, which can impact prices without giving you a hint of what's happening. For now, let's assume the best and use what we can see: the Long/Short Ratio.

Example

First, it's important to understand that the long positions and short positions on all exchanges are equal, maintaining a 1:1 ratio. For example, if Sarah opens a long position of 10 bitcoins, it means that someone else or multiple individuals/entities have opened short positions totaling 10 bitcoins at the same price. In the cryptocurrency futures market, there must always be counterparties for trades to occur. For a more detailed explanation, check out the Coinglass page. I couldn't write it more clearly and precisely than this explanation.

In Balance, as you should be.

How can I use this to my advantage?

Combining the Long/Short Ratio with Volume could give you a significant edge by providing a hint of where the market might go. This is especially useful during low-volume trading days when manipulation is likely. The Long/Short Ratio can indicate where the most damage (most liquidations) is likely to occur.

The 12-hour Long/Short Ratio shows a higher low in long participants over the last few days. It is likely that after clearing the closest BSL paired with lower volume, the market could correct and clear the SSL, which has been untouched for a few days.

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Funding Rates

Often overlooked by leverage enthusiasts, funding rates are one of the more important metrics for traders. They provide insight into the amount of collateral the trading platform actually holds to cover your perpetual contracts. Ideally, the exchange wants to keep funding rates as stable as possible. However, during periods of high volatility, they might deviate, causing high positive or negative funding rates. This deviation results in premiums being given to or taken from market participants to compensate.

Example

When the price of a perpetual contract deviates from the underlying asset price, exchanges adjust the funding rate to encourage long or short positions to pay funds in the opposite direction, bringing the contract price back to the underlying asset price. During a bullish market trend, the funding rate is usually positive and increases over time, with long positions paying the funding rate to short positions. Conversely, during a bearish market, the funding rate is usually negative, with short traders paying fees to long traders.

How can I use this to my advantage?

Personally, I like to use funding rates as a benchmark to gauge the market's bias. When combined with other metrics like volume, funding rates can provide a clearer picture of market direction. It's important to remember that during lower volume periods, the market often moves further than expected to reach a certain level of liquidity, only to revert afterward.

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I hope this article helps you gain a better understanding of your trading platform's purpose, how it generates revenue, and how many wannabe "traders" overlook the fact that the platform profits from the majority of its users. Read the data, draw your conclusions, and work with the system, not against it.