Another entry for our DCA Bot explainer series, by now you probably think that DCA bots are pretty bulletproof. Well, providing good capital management is used and trading with sensible strong/high market cap assets than they arguably are.
This is ofcourse not financial advice!
So why would you or would you not use a DCA bot well let's take a little look at how to measure the performance of a DCA bot.
The Basics
The usual approach to figuring out the performance of trading is:
Money In Trade +/- Profit/Loss = Performance
Pretty straightforward.
DCA bots work very differently as there is capital not in the trade(s) that is used (or may never be used) that has to be taken into account — this is if you don’t want to give yourself false hope and potentially lead to overexposure.
In order to figure this out….
You will need to first understand how much capital you are going to allocate to it to the DCA Bot Strategy- this needs to include not only the capital being actively used consistently in 80%-90% of the trades but also the capital that will be required for the trades 10%-20% of the time. This is arguably the most important capital to ensure is available and allocated — as it is the funds that is likely to get you out of the trades that are “Caught at the top” or simply unlucky — we are not going to go too deep into capital exposure as all that info can be found in our Exposure Article.
Although to find out your expected allocation then this can be deduced a few ways:
Advised by Strategy Provider — When using a professional strategy created and made available by a trusted Strategy Provider (all can be found on the marketplace on Mizar) then few people will know it better than them — so listen to their advice, follow the channels, and reach out to them for support. This will help isolate a realistic allocation to base it on and a cushion if needed.
Safety Order Expectation, Active Trades & Volume Coefficient — If you know the approx. Safety Orders that trade can use. With the number of trades you are running and the Volume Coefficient Multiplier then you can also work out the total expected allocation — it can be a very speculative thought and you really have to have a good understanding
“Simulate” It On Mizar — Instead of risking getting the sums wrong then you can just make use of the “Simulate” function on the Bot Creation page in Mizar. Simply set up the bot to your desired settings and you can quickly see the allocation required per position along with the deviation %.
Summarising The Information
With DCA you are looking more at capital efficiency over performance so the simple formula is:
Total Bot Allocation + Profit (We are in DCA here so there should be no losses!) = Performance
Simple, just a bit more legwork and consideration to get there.
Bending The Rules
There are a couple of exceptions to the rule as you may be very liquid in other strategies therefore not requiring allocation all in the DCA strategy as at any point this capital in other strategies can be called upon. This is why it is always valuable to run varying strategies to diversify capital and resources safely — and it will also make your performance and capital efficiency way more awesome!
“Nothing Works All The Time, Everything Works Some Of The Time” - Words by BlockHead // BlockParty Trading
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