(Not so) Quick guide to DCA bot trading

I was discussing simple, automated trading strategies with a friend, and they asked me to share some links on the topics. This quick-guide is the result of that and hopefully it helps someone out there get into this. If you’re not trying to learn all the ins & outs of trading, this is a way to make some decent coin as the crypto bull market continues.

WARNING: This isn’t financial advice and you can always lose money with any investment. In particular, the strategies discussed are bull-market oriented. If prices start to drop, then you can easily lose money. To limit such losses, one should learn about “risk management”, and develop a way to shut down your bots if/when market conditions turn negative.

I trade almost exclusively on the 3commas platform, and they offer “DCA bots” as a service to make trading/investing in crypto easier. The bots can enter/exit trades for you based on the settings. There are easy-to-use entry signals provided by third-parties, and you can preset your profit and stop-loss levels. Most importantly, there are options to control if/how your bots can buy more as prices drop. This is what they mean by “DCA” on 3commas.

DCA stands for “dollar cost average”. Traditionally, this meant buying into a stock or asset at set time intervals, so you don’t try to pick when to enter but instead just keep buying. However, “DCA” in this case, means to buy more as the price drops, with the goal of decreasing your weighted average entry price. If you spend $100 to enter a trade at a price of $10 (10 units purchased), then you can plan to DCA by buying more when price drops by 5%. If price drops to $95, you buy another $100 worth at $95 and your weighted average entry price drops to $97.50.

Each lower trade made is called a “safety order” (SO) on 3commas. Some people go further and increase their order size with every step down, which further reduces their average entry price. One can also increase the % drop required before each safety order. What else? Safety orders only work when prices drop, so the bots don’t automatically buy more as the price increases (note: you can adjust settings and entry signals to enable this, but each “deal” you create will be able to run the same number of SOs as you set…this can get very expensive).

DCA bots can be used for both long-term trades (“investing”) and short-term trades (“scalping”, “day-trading”). The style I’m pushing in this write-up is technically scalping, with the goal of making small and ideally quick profits of 0.7–1.5% per trade. If you set up the bots on the right coins in the right kind of market, the trade shouldn’t take long to close and you can earn a very nice annualized ROI. Some people run these bots are regularly earning 30%+ per month — more if the market/coin is pumping.

Another benefit to looking for quick profits is that you get more chances to exit. The logic is that by reducing your entry price with each SO you reduce your target exit price as well. The price still has to move up above your entry price but it doesn’t need to return to the original entry price. With the volatility inherent in crypto markets, you can actually get exit opportunities as prices drop. The bot will watch the market for you and exit automatically.

One key aspect of this DCA-bot strategy — that I was slow to come around to — is that your stop-loss (SL) should be either non-existent or very low. It’s common for people to run bots with no stop-loss and simply set a max # of SOs. These people are bullish on price movements and this strategy can get very expensive in a down-market.

Let’s say you have a bot set with a $50 order size, all SOs the same size, 2% price deviation for each SO, and a max of 10 SOs. That means that you’ll keep buying into the coin as price drops by 20% (2% x 10 SOs), your average entry price will be $90, and you’ll be holding 11% in unrealized losses. You’ll also have $550 invested — not your initial $50 order size. If you had a 10% SL on your initial order and simply bought twice (once at $100 and again at $90), you would have lost only $10 (10% loss on $50 order, twice), but because you’re using SOs and the DCA approach, you’re holding a $61 unrealized loss. The DCA strategy will have you investing 6.1x the amount of money between the start and a 20% lower price. If you have a stop-loss at 20%, you’ll lose a lot of money. Here’s a table walking through this:

CLEARLY, this investment approach is highly problematic in a bear market and is suited for situations where you feel strongly that prices will rise. If in the example above, prices moved up 20% (from $100 to $120), you will have likely had 10+ good trades making 1% each time — more if price didn’t move up in a straight line or if you had trailing stops enabled on your take-profit.

I like this strategy for up-trending markets as you’ll do a lot of smaller trades and, if prices do range for a bit or even dip, you can increase your exposure to a high growth asset. This is great for coins that you want to hold long-term, but also good in the short-term for coins that are moving up with good momentum. One just needs to watch the market and turn off the bots if the market gets ugly. You can even link indicators or drawings on Tradingview to your bots to turn them off if prices drop to a certain level. I’m actively testing out these more automated approaches, including using one to turn the bots back on again. More on this coming later.

Key lessons learned (to-date)

1. Start small and with little-to-no money

3commas requires a subscription but they also have a paper-trading feature that will enable one to try out all their features on a virtual exchange, so no capital required. It’s best to start here and see if this works for you.

2. Keep it super simple

There are LOTS of ways to get caught up in new tricks/techniques. I wish I had just done things more manually from the beginning. Start small. Experiment with a few coins / bots and using the paper-trading system on 3commas. Keep what works.

3. Trust the process

Stop-losses: Actually use the advice of accepting deeper losses on trades. It’s pretty fundamental to the strategy.

Up-trending market only: Sideways market may be slow to show good results. Down-trending markets will always show poor results. Avoid them, and don’t judge the system based on performance in a market it wasn’t designed for. There are basic trend-spotting tips all over Youtube, and I may have shared some links in a prior write-up.

My preferred DCA-bot approach

STEP 1: FIND COINS THAT ARE TRENDING UP

(Simple) Watch a set list of coins and only enter when signs of an uptrend are present using 4H, 12H or 24H interval candles. Set up a bot for each coin.

(Moderate difficulty) Use online screeners, like Bitscreener, to find coins that are trending well in the past few hours/days, then create bots for all or each.

(Advanced) Link to an online screener system that will recommend coins automatically and use the 3commas API to automatically create and launch DCA bots (note: this is something that “TheTradingParrot”, see links to channel below, has started experimenting with)

STEP 2: SET UP BOTS USING STANDARD SETTINGS

Order size (BO): Usually something small like 0.5–1% of your account

Note: There are options to set this as a fixed dollar amount or to use % of available capital. If only trading one coin, I’d go with the % approach, as it will use more/less of your account as it grows/ shrinks. If trading more than one coin in a bot or an account, then money used on one coin will impact the others. I think it’s best to use a set order size ($ or BTC, not % of account) for these. As your account grows, you’ll have to adjust the BO of the bot(s).

Entry trigger: 15M or 1H Buy rating (3commas preset)

Take-profit (TP): 0.8–1.5%

Price deviation per SO: 2%

Max # SOs: 10–30

Note: You want to take advantage of the inherent volatility as prices rise. A coin that trends up 20–30% may easily have intermittent dips of 5–10% on the way. Higher max SO is more suited for longer-term investments that you have a lot of conviction on, not short-term trades.

Stop loss (SL): None (manual) or something deep like 20%

Note: If you don’t have a SL, then you manually have to exit all deals on 3commas

Price deviation step-scale: 1.00x

Note: This adjusts the price drop needed to trigger an SO. Above 1 means each SO triggers at deeper and deeper levels. A value of 1.0 means, in this case, that a new SO triggers every 2% drop.

SO volume scale: 1.00x

Note: This adjusts the order size. Some people like to have increasing SOs as price drops to more quickly reduce their weighted average entry price. It can quickly get very expensive though. Greater than 1.00x is an increase in size. Less than 1.00x is a decrease.

Max active SOs: 2

Note: This is how many SOs are pre-set by the bot and waiting to be triggered. This ties up your capital (ugh) but it means your SOs will trigger faster and where you want them to. The efficacy really depends on the coin’s volatility and the price deviation you’ve set. If you’re buying int a volatile coin that can move 1–2% from current price very frequently, then for a 2% price deviation you’ll probably want 1–2 active SOs at any time. If you have a larger deviation, like 10%, then you may not need to worry about having an active trade waiting to trigger.

STEP 3: SET UP DOWNSIDE PROTECTION

(Simple) Set up alerts on Tradingview (TV) to send me an email or text when prices have dropped to a level that I should review my bots. Plus, I can watch my bots on 3C and see the deals and the unrealized profit/loss on each bot.

(Moderate complexity) Use lines/drawing on TV that will automatically tell my bots when to turn on/off or even close my active trades. The line positions are manually controlled by me and updated regularly. I tend to give the bots good room from current prices, to avoid unnecessary exit trades.

(Complex) Run indicators on TV that will track price dynamically and then send messages to my bots if price crosses key levels. One can use moving averages for instance and only let the bots run when prices are above the moving average. If price drops below, then the bots will close all positions and stop running (note: this locks in any unrealized losses).

Step 4: Track performance and adjust

This step is often overlooked but it’s good to go back once a month (or week) to see what worked well and what didn’t. You can see performance stats for each bot in 3Commas, look at what happened with the price chart and review any notes you took during the process. The better you are at recording your thoughts “at the time” the better this process works. This is why I recommend once keep it simple. There will be less variables to changes to get things working well.

ONLINE RESOURCES

I found a ton of good online resources talking about the DCA-bot strategy. Below you’ll find the best of it and some of my thoughts on each resource.

Trade Alts

I found this guy’s vids last but they are great quality. I think that he runs a Discord/Telegram group where he recommends trades to his subscribers. As usual, I’m not recommending that you buy what he’s selling but take what’s useful, especially the free-game he’s sharing.

1. (Early vid) 3commas simple bot tutorial — how I made $15k profit in a month: https://www.youtube.com/watch?v=oil8FpMWs1E
2. Full list of tutorial videos: https://www.youtube.com/watch?v=oil8FpMWs1E&list=RDCMUC0VK_TxdUoVc5XXFvsVg09Q&index=1
3. More: https://youtu.be/tE2Ex5jCV2c

Bitcoin Wealth Club

I first found his vids in 2018 but didn’t pay much attention due to the sketchy stuff he was promoting (USI-tech, I had heard bad things). I’d avoid the paid stuff, but his DCA-bot tutorial is worthwhile, although very long. He takes an hour to explain something that should take 20min. Positive — he uses a simple system with mostly stock tools on 3commas. He did advise to use one paid indicator on tradingview that looked pretty good, but it’s not a must-have

1. How these 3commas bots make me $1,000/day: https://www.youtube.com/watch?v=r4YoLhISws4

Trading Parrot

I ran into his vids in early 2021. He has a paid Patreon/Discord following too and guides them on how to make money with DCA bots. He’s also developing tools to limit losses, automatically find trading opps, etc. All in all, he’s doing great work. I actually subscribed at one point, but didn’t really follow through. I’m doing that now though. He tends to get into a lot of technical detail with indicators and coding on TV. It’s not absolutely necessary. The 3commas system has quite a few entry triggers built in-house and simpler things can be done to get out of trades during bad markets.

1. Basic intro to DCA bot strategy (Link1): https://www.youtube.com/watch?v=zm-PZQuSJYI
2. Basic intro to DCA bot strategy(Link2): https://www.youtube.com/watch?v=goIoYplV-QQ
3. “Bakker” setup — some guy from Netherlands has a way he’s been doing DCA bots for over a year. Nice, simple system: https://www.youtube.com/watch?v=sKSU5g6JXhQ
4. Using a tool to stop bots during down-trending/dumping markets (link1): https://www.youtube.com/watch?v=ZNWBCdyP-mM
5. Using a tool to stop bots during down-trending/dumping markets (link2): https://www.youtube.com/watch?v=FhmRQHnHOAU
6. 100% a month using Binance futures: https://www.youtube.com/watch?v=UJYSKVZaC_o
7. How to use Tradingview indicators for bots: https://www.youtube.com/watch?v=BTmBsuhaV7M

Other links/pages on 3commas:

1. Intro to 3commas trading bots: https://help.3commas.io/en/articles/3108947-trading-bot-do-automatic-trading-all-the-time
2. 3commas crypto trading bot from tradingview indicator in few minutes: https://www.youtube.com/watch?v=FYSB6DzkTIM
3. Composite (multi-coin) bots on 3commas: https://help.3commas.io/en/articles/3331379-split-funds-smarter-with-composite-bots
4. How to use TA indicators with 3commas bots: https://medium.com/@macropus/3commas-update-623dc1d0e2be
5. 3commas tutorial to set up a custom tradingview signal: https://www.youtube.com/watch?v=y4q_5bXs3p0
6. How to create a crypto trading bot in 30minutes using 3commas, tradingview and bybit: https://www.youtube.com/watch?v=CZ7X4lXQKKc

Other links/pages (miscellaneous):

1. (Untested) Intro to DCA (dollar cost averaging) bot on Pionex: https://blog.pionex.com/dca-bot/
2. Pinescript tutorial (series): https://www.youtube.com/watch?v=qYMpPokST-k