Let's start with the basic concept. DCA stands for "Dollar-Cost Average", and it's a trading and investment strategy that aims to reduce the risk of investing a lump sum at the wrong time by splitting up the intended investment into smaller orders.
Breaking it down to the bone DCA it is essentially this:
Due to their simplicity and potential for high returns, DCA bots are popular among beginner crypto traders and investors. DCA bots are readily available on many bot platforms and can be easily customized to fit your trading style and risk tolerance.
DCA might give you fewer returns than investing all at once; however, as you already know, it’s almost impossible to time the perfect entry in the market.
Cryptocurrency trading is the only one except Forex that is open 24/7; therefore, bot trading is convenient as they can trade for us while we sleep or are out about living our lives.
Another reason bot trading is compelling is that it removes the emotional factor that often leads to making mistakes. We all have been there, at the moment of pressing buy or sell, sometimes it’s just impossible to make a decision. The bot will take care of that for you.
There are two main types of DCA spaced across time intervals (time-DCA), price intervals (price-DCA), or both (double-DCA). They are fundamentally different and carry different risks.
Time-DCA is typically used as an investment strategy. It’s the simplest of all and requires the least amount of knowledge to set it up, as you will need to set the bot to invest the same amount at regular intervals. However, this strategy is blind, it will also buy at the top (which you might want to avoid). The previous chart represents an example of time Time-DCA in Fig. 1 where the same amount of money is used to buy apples each month. This strategy is good for a downtrend and sideways market conditions.
Price-DCA is a trading strategy. It is also quite simple, and it consists of buying an asset at different price levels. You can decide beforehand which prices you want to purchase and how much of the asset you wish to purchase. For example, you might want to buy every time the price decreases by 1% and never buy above or below a fixed price. The problem with this strategy is that you might miss the train if the price never reaches your desired one. This strategy is suitable for downtrend market conditions.
DCA bots can use multipliers, aka Martingale system, which consists of increasing the investment's size and or the deviation (distance) of the following orders by a fixed multiplier.
Volume martingale increases the chances and speed of closing a trade. Every additional purchase of an asset from the initial entry will be multiplied by a number (multiplier). The more the price deviates from the initial order, the more asset the bot will purchase. This is possible because the average price of purchase (as could see from the example of the apples), is lower than the average market price. It means we need a more minor increase in the asset's market price to close a profitable deal.
In the two examples below, we want to close the deal with 1%. In the instance with no martingale, the bot buys one coin every time the price decreases by 1%, it fills 5 orders covering a deviation of 4% in a price decrease, so to close in profit, it requires a price increase of 3.1% from the last order.
In the example with Martingale, the price only needs to increase by 2.3% from the last order to close in 1% profit, and we also sell more coins making more profit than with the previous bot.
Martingale increases the chances of closing a deal but also requires more significant capital to invest. So during a long downtrend is very risky to have a Martingale multiplier.
The martingale strategy can also be applied to the deviation of the price, so every order will not be spaced equally in the chart but spaced by a multiplier of your choice. This allows you to cover a more significant deviation using fewer funds. Cryptocurrencies are very volatile, so this tool is handy. As you can see from the example below (Fig. 4), with a multiplier of 1.5% on the price, we can cover almost the same deviation of the bot in Fig 2. spending only three coins.
Both martingale strategies can be combined and work very well in maximizing your chances of closing a profitable deal. In the example below, we can see how we can efficiently use both. As mentioned before, bots with volume martingale use a lot of capital, so it is challenging to cover enough price deviation suitable for cryptocurrency trading. That’s why price martingale is very useful, as it helps find the right balance between safety and budget.
There are three main types of deal start conditions, not all trading platforms have all of the following, so you will need to find which platform best suits your trading style.
ASAP stands for "As Soon As Possible". These bots start a deal immediately and will open a new one once the previous deal is completed. They are used by traders who believe the market will go in a particular direction and want to run as many trades as possible.
Signal bots use indicator signals to trigger the deal start. Signals can be built within the bot platform or sent from an external service (such as TradingView) as a webhook. Gainium has conveniently already included the most popular presets like RSI MACD, QFL: With Gainium you might not need to have a subscription to the external service to send the signal.
Periodic DCA bots open new deals at time intervals, independently of the current market price. Which, as we discussed before, is a form of long-term investment.
When getting started with bot trading, one of the most important things is to understand your risk appetite and how to manage your funds.
DCA bots use a significant investment to run safely. The more deviation you cover and the more funds you use by adding volume with the martingale scale, the safer your bot becomes. However, this has an impact on the daily ROI. So you need to balance how much you want to invest, the profit you want to achieve, and the potential losses you are willing to incur. These are just some of the variables, as you might create a super safe bot from a theoretical point of view, but you are running it with one very risky asset.
There are several tools available to manage your bots; first of all, comes your research learning about Technical Analysis (TA) as well as Fundamental Analysis. (FA). TA is based on the analysis of the charts and aims to forecast the market's future based on an asset's historical behavior. In other words, it is trying to identify a trend and opportunities for trading. FA instead looks at macroeconomic factors to evaluate the value of an asset instead of the historical performance. So it is looking at qualitative and quantitative elements to establish an asset's potential and value.
Once you have done your research, this can also be automated using some filters in your bots: for example, only trading large cap tokens; and with the appropriate deal start conditions, for example only trading oversold tokens if you are running a long strategy DCA.
Another tool to help your risk management would be to switch on and off your bots entirely depending on market conditions. This orchestration can be done again with a webhook alert from an external platform like Trading view. For example, you might want to start your bots when DXY is falling or stop your bots when it’s rising, as the price of the dollar (most of the time) is inversely correlated to the price of Bitcoin.
Many bot platforms provide you with a tool to backtest your strategy. This step is the most essential part of your strategy recipe. It will never be 100% accurate, but it will help you tweak your bots to find the right risk-reward ratio balance that suits your trading lifestyle. Gainium's backtesting tool allows you to back-test your strategy on different timeframes. The smaller the timeframe, the more accurate the backtesting is.
Some platforms allow you to run bots on demo accounts; this is called “paper trading”, so a good practice could be the following. You could do your research, run a backtest and try the bot on paper trading before running it on your real account. It’s important to note that paper trading is also not 100% accurate as several factors cannot be replicated on these accounts.
Many people come to trading and bot trading hoping this would be a get-rich-fast method. This is not the case, and they are often upset when looking at the daily return. However, the daily ROI matters the most, and if you have a good strategy, are consistent, and are perhaps compounding your returns, you will be surprised! No other asset can give you such good returns with proper risk management. Even a small, quite conservative, and achievable 0.1% a day will give you a whopping 43% return when compounding your earnings.
See it yourself here.
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