What is an Iceberg Strategy?

Introduction

In the dynamic world of finance, market stability is often challenged by large institutional investors executing trades that in most cases disrupt the market due to its large volume. To address this, Iceberg orders emerge as a strategic trading technique that conceals the true order size from the market. By dividing a large order into smaller, hidden portions, the Iceberg strategy minimizes market impact and facilitates efficient trade execution.

This article delves into the intricacies of the Iceberg trading strategy and its significance in navigating the financial markets. Also, it takes a closer look at how to place an iceberg order using the Gate.io crypto exchange.

What is an Iceberg Strategy?

The Iceberg strategy, also known as iceberg orders or reverse orders, is a popular trading strategy among large institutional investors. It describes the automated process of executing an order to buy or sell a large quantity of a trade rather than being executed as a single, large order but broken up into several smaller orders. This is a popular method employed by big institutional investors in buying or selling cryptocurrencies or other assets as each small order represents a fraction of the total order size or “the tip of the iceberg.”

Iceberg orders conceal the original order size through multiple divisions of a large single order, often indicating that after the current orders come a greater number of smaller orders ready to be executed, the first order being just a tip of a greater potential trades. This limit order waiting for execution can be referred to as a “reverse order.”

Additionally, iceberg orders are also known as hidden orders with execution following the completion of the visible orders, however, it requires separate brokerage charges or transaction fees to execute each order. Moreover, these orders are executed in a structured manner by a broker or an exchange algorithm. Further, this trading strategy has proven to be a veritable tool in the hands of large institutional investors, and option traders who deal in multiple lots. Average or retail traders who deal with just a few lots aren’t advised to use this strategy.

Why is it Important?

Iceberg orders play a key role in preventing the disruption of the financial market by institutional investors and offer retail traders the opportunity to earn good returns on being able to detect and capitalize on this smart trading strategy—they can buy a particular cryptocurrency just above the price levels supported by an iceberg order. Aside from mitigating market disruption, the iceberg strategy seeks to execute orders at the investors’ desired price without necessarily calling for attention which could lead to an increase or decrease in market price.

How Does Iceberg Trading Strategy Work?

As earlier stated, the iceberg strategy is an order type that reduces orders of large sizes or values into smaller limit orders usually through the use of automated programs or algorithms and for the purpose of hiding the actual order size.

For instance, suppose an investment fund wants to acquire $50 million worth of BTC on the spot market. News of the investment could cause a massive spike in BTC’s price within a short period. Or imagine shorting the price of bitcoin at $41,000 and news broke out that BlackRock will invest $10 billion in the acquisition of BTC in its Bitcoin Spot ETF application following SEC approval. The news will push higher the price of bitcoin as there will be more buyers than sellers capitalizing on the move by BlackRock to acquire more bitcoin, thus liquidating existing positions in the market.

To avoid such a disruption and to mitigate significant fluctuations in market prices, the investment fund employs an iceberg order that splits its original order quantity into a series of smaller, spread-out, limit buy orders of $500 million or $1 billion each, thus, avoiding the attendant buying pressure. Equally, if the institutional investor intends to buy the asset at the lowest possible price or current market price (CMP), they may want to avoid placing a single large buy order that traders could detect and bid upon.

Generally, here are the steps on how to place an iceberg order:

• Initial order: Place a small initial order for a few amount. This will test the market and give you an idea of the current price level.
• Hidden orders: Place a series of hidden orders for the remaining assets or cryptocurrency. These orders will be hidden from the market and will only be executed if the price is favorable.
• Trigger price: Set a trigger price for each hidden order. The trigger price is the price at which the order will become visible to the market and will start to be executed.
• Execution algorithm: Use an execution algorithm that will gradually release the hidden orders over time. This will help to smooth out the impact of the large order on the market.

Let’s explore how to use this trading strategy to place an iceberg order on the Gate.io cryptocurrency exchange.

How to Use the Iceberg Strategy

The Iceberg strategy can be an important tool in the hands of skilled traders who can employ technical indicators to analyze price movements and identify potential entry or exit points. Indicators like moving averages, Bollinger Bands, and Relative Strength Index (RSI) can provide trading signals.

How to Set an Iceberg Order on Gate.io

Here’s a step-by-step guide on how to place an Iceberg order on the Gate.io crypto exchange:

Step 1: Log into your Gate.io account, and click on [Trade] at the top left of the web interface.

Step 2: Toggle on [Trade] to select either [Spot] or [Margin], depending on your preference.

Step 3: Next, click on the search function on the top right of the screen and enter your desired trading pair in the search box, (E.g. BTC/USDT).

Step 4: Following after, navigate to “Advanced Options” at the bottom right of your screen and select “Iceberg Pro.”

Step 5: In this section, the default order type is [Limit]. By toggling the option, you can choose [Advanced Bots] among the options. You may toggle to the option to select [Iceberg Pro].

Step 6: Input your order price variance, activation price, total assets (BTC), and amount per order.

Step 7: Once you have correctly filled in the specifics, you may confirm your iceberg order by clicking [Buy]. Your order will be automatically executed when your order reaches the activation price.

Additionally, if you desire to cancel an existing iceberg order, simply follow the steps:

Step 1: Click on [Open Orders] at the bottom left of the web interface.

Step 2: Find and select the Iceberg Pro Strategy order you wish to cancel.

Step 3: Click [Cancel Order].

Practical Examples of the Use of Iceberg Pro Strategy on Gate.io

To place an iceberg order using Gate.io’s “Iceberg Pro Strategy,” you would have to divide the order into smaller, hidden orders that are gradually released over time. This helps to minimize the impact of the large order on the market and increases the likelihood of getting a favorable price.

Here is an excerpt from Gate.io’s Iceberg Pro Strategy on how you would execute an iceberg order for both buy and sell orders on the exchange.

Example of Buying

• Side: Buy
• Current Price: $20,000
• Trigger Price: $18,000
• Order Price Variance: 0.2%
• Total Amount: 10 BTC
• Amount Per Order: 1 BTC
• Order Price: Buy 1 price x (1 - 0.2%)
• Amount Per Order: 1 BTC multiplied by a random factor. If the random factor is 0.8, then the order amount is 0.8 BTC.

Once the market price drops to $18,000, the Iceberg Pro strategy is activated.

First Order: If the buy price is $18,000, the buying order is set at $17,964 for 0.8 BTC.

Second Order: After the 0.8 BTC order is fully executed, the next order is set. It’s calculated as 1 BTC multiplied by a random factor (between 0.5 and 1). The order price is the newest buy 1 price multiplied by (1 - 0.2%).

Example of Selling

• Side: Sell
• Current Price: $20,000
• Trigger Price: $21,000
• Order Price Variance: 5 USDT
• Total Amount: 10 BTC
• Amount Per Order: 1 BTC
• Order Price: Sell 1 price + 5 USDT
• Amount Per Order: 1 BTC multiplied by a random factor. If the random factor is 0.8, then the amount per order is 0.8 BTC.

Once the market price rises to $21,000, the Iceberg Pro strategy is activated.

First Order: If the sell price is $21,000, the selling order is set at $21,005 for 0.8 BTC.

Second Order: After the 0.8 BTC order is fully executed, the next order is set. It’s calculated as 1 BTC multiplied by a random factor (between 0.5 and 1). The order price is the newest sell 1 price + 5 USDT. This process continues until all orders have been executed, ending the strategy.

Refer to this link for an in-depth understanding of Gate.io Iceberg Pro and on placing an iceberg order on the exchange.

How to Make Profits from Iceberg Strategy?

Profiting from iceberg orders involves understanding the strategy’s mechanics and recognizing opportunities to capitalize on its execution. Here are strategies to potentially profit from iceberg orders:

• Understand Iceberg Order Dynamics: Familiarize yourself with the concept of iceberg orders, their purpose, and how they are executed. This includes understanding the division of large orders into smaller visible and hidden orders.
• Identify Market Opportunities: Monitor market conditions and identify potential iceberg order scenarios. Look for situations where large institutional investors may be entering or exiting a position in a particular cryptocurrency.
• Observe Level-2 Order Books: Use Level-2 order books to observe order activity and identify potential iceberg orders. Look for large orders with a significant number of hidden amounts.
• Analyze Price Movements: Analyze price movements and identify trends that could indicate iceberg order execution. Sudden price fluctuations without corresponding order volume changes may suggest iceberg order activity.
• Anticipate Order Execution: Anticipate the execution of hidden orders by analyzing price levels and market trends. Identify potential entry or exit points based on your understanding of iceberg order dynamics.
• Execute Trades Strategically: Place trades strategically based on your anticipation of order execution and technical analysis. Consider buying or selling at price levels slightly above or below the visible iceberg order prices.
• Manage Risk and Timing: Carefully manage risk and timing when trading based on iceberg orders. Market conditions can change, and anticipated order executions may not materialize as expected.
• Seek Professional Guidance: Consider seeking guidance from experienced traders or financial professionals who specialize in iceberg order strategies. Their expertise can help refine your approach and enhance your potential for profit.
• Practice and Refinement: Continuously practice and refine your iceberg order trading strategies. Backtest your strategies using historical data and analyze your performance to identify areas for improvement.

Remember, trading based on iceberg orders involves inherent risks, and there is no guarantee of profit. Market conditions can change rapidly, and anticipated order executions may not materialize as expected. Always exercise caution, conduct thorough research, and manage your risk tolerance appropriately.

Highlights

Gate.io Spot Iceberg Order of API V4

Prior to December 20, 2022, Gate.io enabled total hidden orders on API V4, allowing institutional traders or investors to completely hide their Iceberg orders. However, with the adjustment of the “Spot Iceberg Order of API V4,” the trading platform now allows for partially hidden orders. In other words, hiding the full amount or actual order size will no longer be permitted.

Gate.io Launches Iceberg Pro

Source: Gate.io

In a recent development, Gate.io launched “Iceberg Pro” which offers more flexible, privacy-focused, and effective trading methods that minimize market impact. Exclusive to Gate.io users, Iceberg Pro is used particularly during large transactions to hide traders’ intentions or actual order size.

Traders intending to execute large trade such as extensive quantities of buy and sell orders can divide it into several smaller orders. Each small order amount is multiplied by a random number (between 0.5 and 1) making it difficult for other traders to detect by just glancing through the market depth and the trading order book. Consequently, Iceberg Pro helps control the attendant impact of large transactions on the crypto market, conceals trading intentions, and mitigates substantial fluctuations in market prices.

Conclusion

The Iceberg strategy is a sophisticated trading technique primarily suited for large institutional investors who regularly execute large trades. Its ability to conceal the true order size and minimize market impact makes it a valuable tool for navigating the complexities of the financial markets. However, retail traders with smaller order sizes are advised to refrain from using this strategy as it may result in negligible market impact and potential for increased brokerage or exchange charges.

Before attempting to use the Iceberg strategy, extensive research, and thorough testing are crucial to fully grasp its mechanics and the inherent risks involved. By carefully considering these factors, traders can make informed decisions and utilize this trading strategy to navigate the complexities of the financial markets.