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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; 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.
What to do if your bot has red bags
The first step in assessing the situation is acknowledging your available options. Those options are:
- Do nothing.
- Close the deal and accept the losses.
- Manually micromanage.
- DCAing your way out.
- Convert the deal to a DCA short bot.
- Convert the deal to a grid bot.
Choosing the right approach depends on several factors, including your knowledge and experience as a trader, your time horizon (how long you can wait), the opportunity cost (what else could you be doing with the funds), your emotional resilience, deal size, and the particular token involved. I've used all 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.
Option 1: Do nothing
It may be painful to watch these red deals and try to avoid panicking, but sometimes the best way to avoid an even worse situation is to do nothing and observe.
This is especially true when prices suddenly 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 dangerous, so you may as well stay out of it until the market settles.
I've made countless mistakes by taking action too early. 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. The market continues to dump, and I wish I had resisted the urge to add more fuel to the fire.
Option 2: Close the deal and accept the losses
This may seem like a mistake, but it can actually make sense for some people. If you are not willing to take additional risk and the remaining 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.
Option 3: Manually micromanage
Another option is to convert your deal to a manual trade and set a specific exit plan. 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.
Option 4: DCAing your way out
This option involves adding more DCA orders if you still have funds available or manually buying base through the DCA bot.
This strategy can be viable 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, consider the potential risks carefully if you go with this option.
Option 5: Convert the deal to a DCA short bot
If you think further downside is still possible, 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 adding additional exposure to the coin.
I recommend covering at least a 50% price deviation when setting a short bot. Since each DCA order is actually selling the token, you may want to set up the bot so that your average sell is higher than your breakeven price.
For Gainium users, you can set up a bot with the following configuration:
- Deal start condition: Manual. This will ensure to start the deal only when you are ready.
- Strategy: Short.
- Take Profit: Disabled. The short bot is already selling the asset as the price increases. Taking profit means buying the asset back, which we do not want. Once all DCA orders are filled, we can cancel the deal and delete the bot.
- DCA settings: Here you can adjust to your liking, just ensure that the final breakeven price is higher than your average purchase price if you want to exit in profit.
Option 6: Convert the deal to a grid bot
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.
A good rule of thumb for setting your upper grid price is to pick the resistance nearest to your breakeven price for that deal. However, it is possible that you will still be at a loss by the time you reach this target, especially 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 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).
