How does the DCA strategy work? Learning together
We have many clients that successfully automate the DCA strategy (averaging) and show good results. However, many traders have difficulties understanding the concept of averaging and setting up our DCA bots. To simplify our understanding, we created two simulators (links are in this article). Use these simulators to independently simulate various market situations and understand the effectiveness of averaging. You can also create a DCA bot in 3Commas using step-by-step instructions.
Share your results in the comments, or ask questions; we are here to help.
A DCA strategy is the practice of investing at regular intervals to reduce risk. When you enter the market right away with all the deposits, you run the risk of purchasing highs and wind up at a loss when the price drops. However, you can invest in parts, reducing risks from the consequences of local price movements, distributing investments over time.
Let’s look at an example:
You invest $1,000 every 30 days for five months. If prices at the end of each month were $100, $90, $80, $70, $95, your average asset price would be $85.5. If you invested the full amount at the beginning of the investment, your value would be $100 per share.
Price with averaging — $85.5
Price without averaging — $100
Now let’s practice.
Simulate various market situations and evaluate the benefits of a strategy. Check out the simulator and come back to this article, we will move on to the next step — setting up DCA automation.
Automate Averaging using 3Commas bot
So, we figured out the DCA strategy using medium-term investments as an example. However, the practice of averaging allows you to trade more efficiently on day trading as well. Unlike long-term investments, it’s wise to automate short-term transactions. Use the 3Commas DCA bot for this (you need to log into the platform’s account to open the link).
- Averaging occurs when the price goes below the initial purchase level.
- Take-profit moves with the average price. Even if the price never returns to the values with which you entered the deal initially, you still have good odds of closing at a profitable level.
- Flexible settings to adapt the strategy to any market situation.
Example of Take-Profit movement for an average price
The entry point is $100 per currency. Take-profit at plus 20%. Take-profit price — $120. The price movement according to the scenario familiar to us — 100, 90, 80, 70, 95, and further goes to 105.
Without averaging, take profit does not work, because the price does not reach $120. With averaging, the cost becomes $85.5, and the take profit level is $102.6. What we got:
- The deal closed at taking profit, although it did not reach its original level.
- The deal closed faster
Now let’s practice tuning the DCA of the 3Commas bot.
How to start DCA bot 3Commas. Step-by-step instruction:
- Register at 3commas.io
- You will receive a confirmation email. Confirm her
- Go to the DCA bots section, to the “Advanced” setting mode
- Fill in the main parameters of the bot.
3Commas does not create a trading account for you, but trades on the exchange account. Therefore, to start working with the bot, you will need an account on the exchange. Connecting the 3Commas bot to your account takes two minutes. However, this is not currently required. If you are a new user, a demo exchange is automatically created for you so that you can configure the bot to it. If necessary, instructions for connecting to your exchange are here.
Think of a name for the bot, select the type.
Single-pair — the bot trades on one pair. Multi-pair — the bot trades in several pairs at the same time. Choose a single-pair bot for the first setup.
5. Select a pair, for example, USDT — BTC.
6. Fill in the settings for opening a deal
You want to buy or sell. Long — buy cheaper, sell more expensive,
Short — sell more expensive, buy cheaper. Take the Long Strategy as an example.
Base order size
Initial market entry volume
Safety order size
The volume with which to open all safety orders. Set it equal to the base order.
Start Order type
Market — the bot will strive to enter the deal as quickly as possible; for this, the most favorable price options from the glass will be selected.
Limit — the bot will strive to enter the deal at the lowest price at the moment, but it may take longer if the selected coin has a small trading volume.
7. Select a condition for starting a transaction — a signal by which a deal will be opened.
You can use technical indicators, ready-made signals of other traders, or create your own signal on TV and transfer it to 3Commas. You can also open a deal immediately after creating a bot. Let’s choose this option. We will devote a separate article to the terms of the start of the transaction. You can also read more about them in our wiki.
8. Set Take-profit and Stop-loss. Do not forget; the Stop-loss level should be lower than the price level of the last insurance order.
9. We proceed to set up safety orders.
Max safety trades count
Here you indicate the maximum number of averages per trade. How many orders you specify is the maximum number of orders to open if the price goes against your forecast. For example, you indicate ten orders, but one may be enough, and the deal closes in profit.
Max active safety trades count
You can immediately place a grid of several averaging orders, placing all transactions in a glass, thereby blocking the necessary funds. With a single active insurance order, the grid is set, expecting the price to move against your forecast. The difference between one or several simultaneously active insurance orders is only in funds that will be blocked on your account immediately after activating the bot.
Price deviation to open safety order
The increments at which to place your safety orders. This parameter is responsible for the “distance” between orders in our grid. By placing a maximum of 4 safety orders and not changing their volumes, we get a grid of orders in increments of 3%. In the case of execution of all orders, the breakeven point will be 94% of the first order.
Safety order volume scale
The coefficient by which the amount of each safety order will change. So, specifying a volume multiplier equal to two and starting a trade with $100, the bot will place the first averaging order in the amount of $200, the second is $400, and so on. This allows you to bring the breakeven point closer to the last order, but also spends a significantly more significant part of the deposit, in contrast to the “uniform” averaging, when the factor of the volume of insurance orders is 1.
For a better understanding, consider an example:
A bot has been created with an initial safety order of 100 USDT and a multiplier of 2. It will place orders using the following logic:
The first order is 100 USDT;
The volume of the previous order is multiplied by a factor. 100 * 2 = 200 USDT;
The volume of the previous order is multiplied by a factor. 200 * 2 = 400 USDT;
400 * 2 = 800 USDT.
Safety order step scale
Allows you to place orders not evenly but through the specified step. By setting this factor to 2, and the initial step of 1%, we get the following orders:
This is the first order and only a step is used to place it: 0 + -1% = -1%.
The step of the previous order is multiplied by the coefficient. The resulting step is added to the level of the last order. The last step was 1%, the new one would be 1% * 2 = 2%. The order will be placed: -1% + -2% = -3%.
Step: 2% * 2 = 4%. Order: -3% + -4% = -7%.
We recommend that you do not use multipliers in the first setup. Leave the values unchanged.
After we configure our bot, we need to double-check the stops and whether all the parameters are specified correctly. After that, click on the “Create Bot” button on the right block.
If everything is correct, then you will see a window offering to launch your bot.
You can view all the information about the bot in section Bots> My Bots.
There you can disable the bot, view detailed information, statistics, etc.
Exact setting of the parameters of safety orders allows you to not only make good money but also to gain a plus after a drawdown, shifting the breakeven point in the direction we need. The main thing to remember is that the deposit is not endless.
If you have questions about setting up bots, write them in the comments on the article, we will answer.
Have a good trade!