Crypto Trading - How to stay safe
My attempts to stay on the safe side while automating the trades
My crypto trades are automated, which, to a large extent, takes out all the human emotions from the trades. It is a 99% good thing, because emotions can easily swing and trigger irrational decisions to be made at the wrong times, e.g. Buy at the top (FOMO) or Sell at the bottom (FUD).
So with automated trades, the trade will start when there is a buying signal generated from TradingView and keep adding and buying more once the price retraces to a defined level.
This method worked well in August, when the market was going up and up with minimal retraces. In fact I was happy to see prices retracing because that means the trading bags will keep increasing and thus expanding the profitability.
Then the market tanked, big time. 50% retraces were common. I had two months of holding the bags with minimum profit. I learned my lessons and did the following to make the trades safer and more sustainable (in both bull and bear market):
To be able to stomach bigger retraces. So previously the bot would keep buying until price retraces by up to 10%. Now I set it to be buying with bigger steps interval and dollar-cost-average buy until the price retraces by 85%, which is a doomsday case of a deep market correction. I’d rather cater to the worst scenario.
Double down on dollar-cost-average strategy. With each price retrace, if the next purchase size is bigger, then the average price goes down further - making it easier to sell once the price bounces back. Currently I set at 1.38x of purchase size (in terms of coins purchased) with each step the price drops.
The chart below visualizes the trade actions:
The x-axis represents the number of trade that takes place. Each additional trade happens if the price retraces further and reaches a target. Each additional trade size also increases (blue line). Total capital used for the trade is represented by the green line.
In the graph below, you can see how the average price goes down as we dollar-cost average.
Compounding. Each trade will generate a certain amount of profit that goes back to the total capital available. Once it grows a certain size, the multiplier coefficient for each trade will increase by 0.01. So next time it will increase to 1.39x, with consideration of the next point.
Limiting the total capital used. In the worst scenario, the price will retrace and not bounce back enough to make the sell trade. In this case, new trades need to take place in order to capture the price fluctuations at the bottom. This means the algorithm should never use all the capital available. Currently I set to use up to 50% of the total capital. If the price plummets and existing trades are stuck (despite the safeguard measures above), I will open new trades.
So this is how I am making the trades automatic and safe at the same time. To be adjusted along the way. This is like building a rocket while the stage is set to take off. We just need to ensure that both the propellant and parachute are ready when it’s needed.