Beginner’s Guide to Crypto Trading Bots — Part 12 — Core Concepts
This is the New Chapter 2….
This is the New Chapter 2….
Core Concepts
Swing Theory 101
Mainstream cryptocurrencies fluctuate in value an average of 1% to 5% daily. If you look at the history charts — week, month, year, this is pretty consistent.
Capturing profit from price fluctuation is called swing trading.
Swing trading is a short-term gains strategy that relies on volatility and buying and selling quickly to generate more gains than would normally be achieved through buying and holding long term in expectation of value increase.
Swing traders will use market indicators, chart patterns, and other analysis tools to attempt to forecast the direction of price movements and capitalize on trends. They take advantage of transient opportunities and adjust to shifting market conditions.
Because of this powerful adaptability, swing trading is perfectly suited for the quick-paced and extremely volatile cryptocurrency market.
Buy Low, Sell High.
Lather, Rinse, Repeat.
The Automation of Swing Trading is the fundamental purpose of the majority of simple cryptocurrency trading bots.
There are other types of bots such as signal-trading bots, copy-trading bots, etc, but for the most part mainstream trading bots focus on finding opportunities in price fluctuation.
Getting Your Feet Wet
Start Small!
Start by only investing small amounts into your crypto bots. This is what it takes to gain trading confidence.
You never want to invest big, loose big, and end up knocking the wind right out of your sails before you truly get started. Loosing big can be a serious motivation killer!
How much should I invest when I start?
$100 is my gold standard for all new bots I am testing. This is good starting point for crypto bots. You can start lower if you prefer.
Always start small on any new unfamiliar bot, even if you think you totally understand what the bot is doing. My $100 rule is still in effect today when I test new bots I have never used before.
Invest too little, and you run the risk of trading/transaction fees eating into your returns, especially with ETH or ETH based tokens.
Invest too much, and you risk having a big loss kill your motivation to keep going.
Your Flow-State = Your Comfort Zone!
Eventually almost everyone discovers a bot or set of bots that they become more comfortable with than others. These favorite bots become easier for us to predictably profit, and using them will ideally end up feeling like a comfortable repetitive set of behaviors. While there is much to be said of leaving your comfort zone and trying new things for the sake of personal growth, with trading, I think the inverse is true once you really identify the flow-state for yourself.
Once you find a bot or set of bots that work and profit for you consistently, go with that. Keep using them until they are almost second nature. Then start to invest more into THOSE bots.
Pretty much all the successful traders I have met have incredibly niche individual strategies. They are living in their own little universes doing WHAT WORKS for them. They may have started out testing and trying a little of everything, but eventually they ended up hitting on something and pulling those levers on repeat.
Many of them are so comfy with a specific set of tools that they can spot opportunities by themselves and take risks with greater confidence.
In 2022 my confidence started to grow when I found a bot called a “Martingale”. My confidence peaked enough to stick $1000 into this bot, and within a few weeks it had captured $100 for me. 1% every day or two, until I hit 10% of my investment.
Then over the next few weeks Litecoin’s price dropped and my bot went negative by almost $300 and I let it sit there because I didn’t want to take the loss.
The bot was sitting around 28–30% loss. 5 months later, my bot came out of the red and back into the green, but when it happened I learned two important lessons:
A trading bot being in the negative is an unrealized loss — it doesn’t mean a loss unless you close the bot and sell for a loss.
However — being in the negative does mean that the bot is stuck, unable to generate any profit, which I have come to learn is actually an Opportunity Cost!
When my bot recouped into the green again, I decided it was time to test different settings and that I would also try to stop the bot before the loss was too great so I could keep it in action instead of letting it sit stalled out.
There are other ways to handle being in the red too, such as closing the bot but instead of selling off, you select the option to hold the crypto instead.
Stop Losses On Bots Are Like Training Wheels
Every trading bot will have a parameter that allows you to define a loss amount where the bot closes and stops when it hits a defined price trigger. I highly recommend testing these settings to get a feel for what they do, especially while you are testing with lower balances.
For some bot strategies, a stop loss is as vital as a sailor’s lifeboat. For other strategies, a stop loss can feel more like bumpers on a bowling lane. Optional, and maybe even impractical or harmful.
Keep this in mind — if the price trend is downward and only continues downward, stopping at a loss repeatedly is also not very productive and can generate big losses. I’ve done this before.
This is one of the most common snags that happens to new traders that scares them away from trading, and it takes a bit of learning “all the extra stuff” covered later in this Beginner’s Guide, such as market analysis, parallel testing, etc, before you get a hang of it and can better minimize your losses. Just know if it happens to you, you aren’t alone. We have ALL been there.
Stop losses can be trickier than we think! They sound like the best idea ever. Yet, I have never lost more money than when I was using preset stop losses. They accidentally caused me more losses than manually closing out and only stopping in the event that I am almost certain the price will not recover in an acceptable timeframe.
Much of the time, the price will cross what I might have defined as my stop loss threshold, then recover quickly. The stop loss acts as a brick wall with no discernment, always stopping at a loss. The way I choose to run my favorite bots, stop losses can be more harmful than good. I prefer to be more flexible than a hard limit.
Quite often, I will let a bot sit in the red for a few days IF I have reasonable expectation that there will be an uptrend in price soon. If I think the trend is going to continue downward, I stop the bot, always trying to stop in the green, but settling on a loss if I think I have to. Usually, I will restart the bot with the new configuration that I think is appropriate for the current price trend.
There are exceptions of course. I do not restart a bot immediately after stopping it if price is in free-fall. If a price crash event happens, I may wait for the price to stabilize before restarting my bot.*
I am not always correct with my predictions and analysis, but because I am primarily bot trading on Bitcoin, Ethereum, and Litecoin, I am not very concerned that my bot won’t recoup into the green eventually. (Other coins have proven much harder to predict.)
*Note : There are ways to profit off a general downtrend or a price crash, which will be discussed later in this book in the Advanced Bots section.
Different Strokes for Different Folks
There are many different types of trading bots. Some are very creative, others are very basic. This book covers all of the most basic bots, as well as discussing the general operating idea behind a few more advanced bots.
The ways in which you can automate profit in this digitized currency world are…. kind of staggering. But we all have to start somewhere, and that is why this book exists! To help you get your feet wet, and take you on the first few steps of a ride that may change your life.
Not all bots make sense to everyone at first. You need to test different bots with small balances, and find the bot that work for you!
Keep a Spreadsheet or a Journal
You need to keep a record of your results! I cannot overstate the importance of this. A spreadsheet and/or a personal trading journal is a good idea depending on your personal learning style.
Trying to push forward without logging your results may end up in frustration and wasted time.
Did you know it is possible to make the same mistake, twice?
It sucks, I’ve done it. My journal prevents that now, as it helps me solidify my thoughts and my future response to a loss scenario when it happens. It also helps me remember and memorize past configurations and ideas that worked well without having to always consult my ever growing spreadsheet of numbers and dates.
My journal helps me gather my thoughts and the spreadsheet organizes my data.
Some people might not care for a journal and just log the raw numbers. That is ok too. I do better personally when I also scribe my thoughts about it, but you should adapt the way you keep your records according to your learning style.
Goal Setting
When you are ready and feel confident in the bot you are testing, it is time to level up and push yourself.
What are your personal goals?
For me, I wanted to created bots that would create a livable income for me, so I could pay all my bills and live off of trading bots, and really spend time mastering this.
Keep in mind — that was MY goal, and might not be the best crypto investment strategy!!!
Many pro crypto investors have laughed at all the crypto I have liquidated to pay bills, knowing very well that hoarding it over time is likely to pay off far more than just using bots as an income generation tool.
Good news, you do not have to have the same goal that I did!
A good place to start with goal setting — ask yourself, what do you want from your bots?
Do you want to accumulate more crypto? Or do you want to pay your bills? Pay off some debt? Maybe any or all of the above?
What if you had a different bot or set of bots running to support each different goal you had? One to pay a debt, one to compound crypto, one to pay for say…. a new car?
What kind of returns are really going to keep you engaged in the game?
How much do you need to invest to actually hit that goal?
When I started, I only invested small amounts until I found something that was working well enough to both excite me and motivate me.
For me, the magic number was wanting an extra $2000 per month, and deciding I was going to use bots to do that. If I could achieve that, I could maybe repeat it and scale it.
Outlining a clearly defined plan for myself is what really pushed me to practice and push my bot trading.
I decided to master the Martingale bot since these bots were performing the best for me and they seemed the easiest for me to understand, predict, and adjust my actions.
You may decide on a different bot, but you’ll only know once you test different bots and get a feel for how each bot operates.
Turn Goals Into a Game with Prizes
Ok. This one is admittedly a little quirky. This works for me, but maybe I need a little “Twinkie on a string” more than others.
Sometimes with goal setting, it helps me to make little games or do things to entertain myself and break up the monotony of testing configurations and taking notes.
It all started with a single $100 Grid Bot and soon this became a fun hobby for me to challenge myself to learn and experiment. I would set prizes for myself for hitting certain goals. I told myself that my first 100% ROI, I would buy myself something with what my bot had gained. I wanted an to buy an iPod for my truck for road trips, so I put a picture of an iPod at the end of my chalkboard.
2020–2022, I tested quite a few $100 bots. I had 3–5 bots going at any given time, parallel testing different settings with Grid Bots and Rebalancing Bots to see what the settings really did.
I would draw dumb little cartoon avatars for each bot up on my chalkboard, racing each other in steps. Left side is the starting line. Right side is the finish line, 100% ROI. I would create 10 lines, and race my bots by trying to see which one would ROI the fastest. Each time the bot captured 10%, it’s avatar would be erased and moved forward to the next space.
Stupid, I know, but it entertained me and that’s all it really needed to do.
Let’s do some math!
In order to earn $2000 per month, I’d need to profit an average of $66 per day.
If I invest $1,000 into a crypto bot and I configure it to try to capture about 1% on the daily value swing, how much am I going to try to capture?
1% of 1000 is $10
That doesn’t really excite me.
If my bot is profitable, it’s only going to be capturing $10 each time.
What about $10,000?
1% of $10,000 is $100
That is a bit more exciting!
So I need to invest about $10,000 into my crypto bot to see the daily results I want with a Martingale bot.
Once I finally had a goal in mind, I set myself with the task of accomplishing it.
Once I found a strategy and a bot that was capable, I ran with that and continue to use this strategy almost 2 years after I started seeing results with it!
Chapter 2 Key Points:
Start with small balances. $100 is a good starter balance for a trading bot, but you can go lower if the platform has a lower minimum.
Bots are tools and different bots accomplish different things. We sometimes become masters of different tools. Test different bots and find the bot(s) that suit you the best.
Stop-loss settings can be vital for some trading strategies, but these settings can also be dangerous, so test them out and get an idea of how they impact different bots while you are using smaller balances.
Take notes and keep a spreadsheet and/or a journal to keep track of your data. Documenting your bot activity is crucial for learning over time.
Once your favorite bots and strategy are becoming consistently profitable for you, test bigger balances.
Set profit goals for yourself to level up and make an action plan based on those goals. Turning your goals into games may help keep you engaged.
Continue to the Next Story in This Series:
Beginner’s Guide to Crypto Trading Bots — Part 13 —Bot Configuration Basics
The settings of most of today’s trading bots are like cars: automatic or manual.
Thank you for reading!
Until next time….
Onward and Upward Everybody!
-Chris
Automated Income Lifesyle w/ Chris Morton YouTube
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