Dollar Cost Averaging (DCA) has been proven to be one of the most effective strategies when it comes to investing.
DCA is the process of making subsequent purchases of a particular stock over time to get a better median cost price for your total purchases rather than making one large purchase and not spreading your capital out.
This has worked well in the past mainly because all assets fluctuate in price (especially cryptocurrencies), and making multiple buys increases one’s chances of getting the token at a lower price.
The emergence of specific tools like the Advanced DCA bot now makes it possible for traders to completely automate this strategy.
But whenever we receive new tools like the Advanced DCA bot, we usually have to take the time to understand how to use them.
Slow and Steady
There are two main types of bots, simple and composite bots.
Composite bots trade across multiple cryptocurrency pairs simultaneously, while simple bots trade on a single cryptocurrency pair.
For those with limited experience using DCA bots, or bots in general, starting off using composite DCA bots may be the best option until you can identify a trend in a specific token pair, which you could then create a simple bot to take advantage of.
Once you’ve successfully deployed your first DCA bot, it’s up and running, and perhaps even in profit, it can be tempting to want to initiate more bots.
However, this is how many traders, even experienced traders, get in over their heads.
Focusing on one bot, seeing where it is effective and ineffective in strategy to then use that information to make a new superior bot, and continuing that process over time is how traders forge winning DCA bots.
Base order size is the size of the initial trade made by the bot, the entry order into the market.
Safety orders are orders that execute once the asset drops a certain percentage below the base order.
A frequent mistake made by traders utilizing this type of tool is that they set the base order size larger than the safety order sizes.
This is counterintuitive as with the DCA method; not only is the price of the token expected to drop, it’s actually better if it does because it gives the purchaser an overall lower average cost of the token.
Not spreading safety orders out far enough from the base order size can also hinder returns if the asset continues to drop past the stop limit.
By setting safety orders too close together, you could be missing out on the opportunity to buy said crypto at much lower prices, reducing your required upside risk to break even and then profit.
Of course, you also want to make sure you are managing your DCA bot even if it is supposed to be a “passive” source of income because, at some point, your strategy will need updating, especially if market conditions change as they always do in crypto.
For those running leveraged coin bots, forgetting to pay enough attention to this type of bot can quickly result in a blown-up account.
And last but not least…
Don’t Get Greedy
Nothing goes up forever; usually, when the tide starts turning the other way, it does so swiftly.
Many traders have seen bots return them hundreds of percentages in profits, only to see those gains diminish and eventually turn into a loss for reasons such as being too bullish on an extended market, where greed gave them the impression that the price would go up forever.
Shorting coins without a minimum price target (which would be the opposite of the above scenario) can also be dangerous as, again, even after a significant run-up and a retracement back down, another price rise is inevitable, and if no minimum price target is set, you will continue to sell that token. Once the price reverses up, you could be left with little to no tokens.
Setting take-profit levels too high can cause traders to miss out on other trading opportunities; as with DCA, it’s not about massive moves; it’s about capitalizing on small movements frequently.
While it isn’t uncommon to hear about winning trades equating to hundreds, and sometimes even thousands of percentages of returns, those trades are usually one-offs, far and few in between – the key is winning small trades consistently.
By setting take-profit levels at a few percentages above the order size, users maximize the chances of increasing the number of orders filled, and if the process is repeated successfully, compound investing would eventually help to propel the account value.
Taking it All In
Trading with a DCA bot is a luxury that wasn’t available to investors even just a few years ago.
Adjusting to anything new will come with a learning curve and require patience and commitment, but it usually ends up worth it in the end.
A DCA bot can be that and more to the right trader under the right circumstances.
Take time to fine-tune your strategy, focus on one bot at a time, and perfect it until you can consider it successful – then rinse and repeat.
It may take some time, but as long as the responsible risk and capital management are practiced, things will even out.