Understanding Your DCA Bots
Traditionally, dollar cost averaging, or DCA for short, is done by routinely making investments into an asset to curb volatility and hopefully reduce your average buy price. In 3Commas, the same method is used, but with a more mathematical approach.
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The first thing to understand is that the bots work by placing a single Base Order, a number of Safety Orders, and a Take Profit Percentage.
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The Base Order (BO) is simply the first buy that the bot makes into the market.
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Safety Orders (SO) are orders placed at set deviations beneath your Base Order that tell your bot to buy as the price decreases.
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Take Profit Percentage is the percentage gain at which your bot will sell everything itβs purchased.
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Letβs take the following bot for example:
AVAX/USD
Take Profit Percentage: 1.5%
BO: $20
SO: $40
Number of Safety Orders: 15
SO Deviation: 2%
Your bot begins by placing its base order of $20, and therefore buys $20 of AVAX. The price then decides to go up 1.5% (the take profit percentage you set), so your bot sells the $20 of AVAX you just purchased and you net 1.5%, or 30 cents, of profit.
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But what happens if the price goes down? This is where the Safety Orders come into play. Weβve told our bot to set 15 Safety Orders at a deviation of 2%. This means that if the price drops 2%, your bot will double down on itβs initial buy and purchase $40 more AVAX. If the price continues to drop, your bot will continue to buy every 2% until all 15 Safety Orders have been filled (accounting for up to a 30% drop in price). Each time the bot fills another Safety Order, this in turn lowers your average buy price, and therefore reduces the amount that the price has to go back up again in order to take profit. In addition, it also increases the amount of AVAX that is going to be sold when the bot finally does take profit.
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So, for example, if the price of AVAX dropped 4%, the bot would fill two Safety Orders. Then, if the price rises to your 1.5% take profit price, the bot would sell $100 of AVAX and net you $1.5 profit.
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At a high level this type of investing strategy is called the Martingale Investment Strategy. You can use this strategy in the stock market and even on blackjack at the casino. However, the reason that this strategy performs without fail in the world of crypto is due to crypto's volatility. A typical alt-coin can rise and fall drastically in a very short period of time when compared to traditional Wall Street stocks and mutual funds. This means that as long as the coin you are trading does not permanently crash, we can assume that the value of the coin will most likely go back up after a short period of waiting. In turn, this means that if you have a trade where you have used all your Safety Orders, you only need to be patient for the price of the coin to go up before the deal closes with a marginal profit.
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Additionally, unlike wall street, the crypto market never sleeps, which means these trades can be executed 24/7. This is another reason why setting up a bot to run your trades is more effective than personally trying to buy and sell short positions for profit.