If you have been using crypto trading bots long enough, chances are some of your bots were left holding “red bags.” This term refers to a deal with a significant negative PnL. Exiting red bags for profit is more of an art than a science, and the best approach depends on various factors. In this article, I will explain the process I followed for my own red bags, and hopefully, it will give you some good pointers for managing yours.
The first step in assessing the situation is acknowledging your available options. Those options are:
Choosing the right approach depends on a few factors, including your knowledge and experience as a trader, your time horizon (how long can you wait), the opportunity cost (what else could you be doing with the funds), your emotional resilience, deal size, the particular token involved, etc. I've personally used every one of them, but my favorite is exiting with a grid bot. Each situation is unique, and you may mix and match any of those options to suit your needs.
Let's review each option in more detail.
It may be painful to watch these red deals and try to prevent yourself from hitting the panic button, but sometimes the best thing you can do to avoid an even worse situation is to do nothing and observe.
This is especially true when there is a sudden price drop. When markets dump, we often underestimate how far down they can go. Trying to time the bottom, aptly named “catching a falling knife,” is a dangerous endeavor, so you may as well stay out of it until the market settles.
Taking action too early is a mistake I've made countless times. Even though it may feel like the price is already super discounted and you may never get a chance to buy at this price again, let me tell you, that is rarely the case. More often than not, the market continues to dump, and I wish I had resisted the urge to add more fuel to the fire.
This may seem like a mistake, but actually, for some people it can make sense. If you are not willing to take additional risk and the remainder funds involved in the deal could be better used elsewhere (opportunity cost), you can consider cutting the losses and moving on.
In most cases, though, closing the deal right after a dump might not be the best time. Markets tend to rebound, so waiting a little before acting on it could pay off. Furthermore, you can set a DCA short bot or a grid bot without taking any more risk (last option), so review all other options before throwing the towel.
Another option is to convert your deal to a manual trade and set a specific plan for how you want to exit. This option allows you to set parameters that may not be available with a bot. For example, you may decide to sell a portion of your red bags at a loss to free up some funds. Or perhaps you are waiting for your favorite indicators to give you a signal to buy or sell.
This option involves adding more DCA orders if you still have funds available or manually buying base through the DCA bot.
This can be a viable strategy if you get the settings and timing right. Note the “IF”; timing the market and predicting how far down the price can go is extremely difficult. In addition, you are adding exposure to that particular coin, potentially unbalancing your portfolio and adding more risk. For those reasons, if you go with this option, consider the potential risks carefully.
If you think further downside is still on the table, a viable option is to short the red bag with a short DCA bot and try to squeeze as much value from it as possible. This option has the advantage of not having to add additional exposure to the coin.
When setting a short bot, I recommend covering at least a 50% price deviation. Take into account that each DCA order is actually selling the token, so you may want to set up the bot in a way that your average sell is higher than your breakeven price.
For Gainium users, you can set up a bot with the following configuration:
Lastly, my favorite option is to exit with a grid bot. The advantage of a grid bot is that it can be configured to have less risk than a DCA bot (if no buy orders are set). As long as you choose a wide enough grid, the profit generated from the volatility will accumulate and eventually could cover your losses completely.
Setting the grid width depends on how long you are willing to wait. As a general rule, the wider the grid, the longer it would take to exit, but the more profits you can generate along the way.
A good rule of thumb for setting your upper grid price is to pick the nearest resistance to your breakeven price for that deal. However, it is possible that you are still at a loss by the time reach this target, specially if there wasn't enough volatility on the way up. If you can afford to wait, I recommend setting the upper grid price to a strong resistance that is higher than your breakeven price.
For the bottom price of the grid, you may choose the strongest support level close to the current price. When considering the bottom price, you would want to decide if you are willing to add buy orders (i.e., choosing a price under the current price) or would like only to use the existing base (i.e., selecting a price over the current price).
If you are using Gainium's grid bot, you can set the initial purchase price to be the average price of the red bag. It will automatically keep track of your breakeven price (taking into account any profit generated).