What Is a DCA Bot And Why Are Traders Using It?

Trading can be a daunting avenue to take. It requires a lot of time in understanding the market, research, and analysis, as well as learning trading strategies that work. In addition, these tasks are repetitive – you do them daily or even more frequently depending on your trading style. These are the reasons why many traders look for ways how to automate trading.

In this article, we’ll share with you the most powerful and effective way to automate trading – through DCA Bot. So, what is a DCA bot, and is it a reliable solution for automated trading?

What is a DCA bot?

In a nutshell, the DCA bot is a program that buys and sells assets on your behalf at a particular set of instructions and intervals. It relies on the DCA (Dollar-Cost Averaging) investment strategy for its executions.

The DCA investment strategy is a trading strategy designed to reduce the impact of volatility by purchasing inappropriate volumes in a fixed period. Instead of making one big investment during market volatility, the DCA strategy suggests purchasing in small amounts separately at fixed intervals to reduce risks and increase the chances of potential profits.

Dollar Cost Averaging
Dollar Cost Averaging

The strategy suggests a flexible investment amount at a fixed time interval regardless of the market situation and price value. Unfortunately, the DCA works best only for markets with high volatility and for assets in consolidation.

How it works

How the DCA bot works is that it starts by purchasing the asset or cryptocurrency of your choice at a specified entry price level. The bot will execute purchases at a designated interval that the trader chooses – the interval can be hourly, daily, on a weekly basis, and more. After the purchase, the bot waits for the price to reach the target price level and then exits the trade. When the exit has been made, the bot repeats the process of purchasing at the set entry price level and selling at the set exit price level.

Among the best providers of DCA, bots are 3commas with their complete settings and features for managing and automating any kind of trading strategy such as the DCA trading strategy. If you want a comprehensive guide on how to create DCA bots using 3commas and how to improve your trading, visit our free course and take advantage of many other tips and advice for trading. The best thing about using 3commas for your trading bot needs is that it gives you a complete guide and walkthrough on all the processes. It also features a friendly user interface that both the experienced and the beginning trader can easily manage.

3commas Dashboard
3commas Dashboard

Going back to the DCA trading strategy, here is a comparison between a trade that uses DCA strategy and trade that uses traditional trading practices.

Traditional Trading
Traditional Trading

This first image shows the traditional strategy of trading where the green hand shows the buying point of the trade, and the red hand shows the selling point of the trade. The blue area shows the profit potential of the trade.

The traditional strategy of trading implements an initial investment of the full amount of the capital.

DCA strategy
DCA strategy

This next image shows a chart that implements the DCA strategy. This example shows a series of purchases (as shown by the green hand) at a fixed time interval. The size of the hands shows the size of the investment – so the smaller the hand, the smaller the investment, and vice-versa for the big hands. Alternatively, look at the profit potential of this strategy through the shaded blue area.

This DCA strategy shows that it has a fixed time when to make purchases. Also, the amount or volume of positions bought depends on the price level. The higher the price, the smaller the volume – and the lower the price, the bigger the volume bought.

While the DCA bot works for long-term traders, it is also a great option for short-term or day traders. Although it may look simple and the concept is easy to implement even by beginners, there are a lot of things involved in the process. The trader must understand which asset can use the bot – the DCA bot strategy is not always applicable for all kinds of markets. Furthermore, the trader needs to know the ideal price levels for entry and exit. Thus, it is important to understand that although using the bot is straightforward, the trader needs to have a good understanding of the market – and the general concepts of trading.

Benefits of using DCA Bot

Here are some of the advantages of the DCA bot for trading.

Can be used by traders of all levels

The very first thing that traders love about DCA bots is that anyone can use them. Regardless of the trading skills and experience, any trader can use the bot effectively to improve trading performance. DCA bots have straightforward walkthroughs and guides on how to use its system. Furthermore, all DCA bot providers such as 3commas have a huge assortment of instructional videos and articles on how to effectively use a DCA bot.

No more FOMO

‘FOMO’ which stands for ‘Fear Of Missing Out’ is the misbehavior of a trader wherein he or she tries to dive into a trade that is currently skyrocketing without even performing due diligence about the particular asset. This behavior often leads the trader to huge losses the instance the market starts to drop.

With the DCA bot, these baseless judgments and actions are averted. The DCA bot uses only settings and price levels that are carefully planned as well as researched to avoid making any rash decisions that could lead to big losses.

Profitability in volatility

Many traders try to avoid a volatile market for the reason that while the market price can increase substantially, it can also drop substantially thus leaving huge potential losses. The DCA bot takes advantage of volatile markets by trading only at a specific price level for its entry and exit. Every trade is executed exactly on the appointed price levels regardless of the time and regardless of what is happening on the market.

Better money management

The DCA trading strategy lets you effectively manage your money in trading. Instead of making a single huge investment of your money which can potentially incur a huge loss, the strategy enables you to invest only a portion of your capital. Investing portions of your capital separately in the market enables you to reduce the risks of incurring huge losses.

In the long run, small portions of investments make bigger profits than investments made in bulk.

Our final thoughts

Using DCA bots is an effective way to manage and deal with the shortcomings of a trader which include FOMO, lack of patience, untimely entry and exits, poor money management, and many others. While it can be the best trading system to use, it doesn’t guarantee huge profits in a short time. It only reduces risks and profits are made at a slowly-but-surely pace. Nevertheless, profits and low risks are what traders want and it is exactly what the DCA bot can potentially give.

If you want to know more about trading bots and how to make the most out of the Dollar Cost Average trading strategy, check out our free course. It features helpful guides, tips, and trade secrets on how you can improve as a trader.

Enjoy and good luck!

DCA Trading Blog