Table of Contents
Introduction to Automated Trading
Trading Strategy
Market Analysis Tools
Trade Execution Process
Strategy Direction
Limit Order Scaling Dollar Cost Averaging (LOSDCA) Strategy
Risk Management
Understanding Derivatives
Convexity and Leverage
Counterparty Risks
Emotional Management
Legal and Regulatory Considerations
1. Introduction to Automated Trading
Automated trading with cryptobots.io starts once your funds are deposited in an exchange and your trading API keys are submitted. The system then connects your account and begins executing trades based on our volatility-based strategy, capitalizing on day-to-day asset price fluctuations in the cryptocurrency markets.
2. Trading Strategy
Our proprietary algorithm leverages volatility clustering theory to analyze market movements through standard deviations. The strategy adjusts for both bullish and bearish conditions by aligning with broader market trends, often indicated by cycles.
3. Market Analysis Tools
We use various indicators to gauge market conditions, including:
Liquidity cluster maps
Heat maps
Proprietary indicators
These tools help determine the optimal placement of limit orders.
4. Trade Execution Proces
Initial Order
The trade is initiated with a foundational "base" order, which is sized as a small percentage of the overall account balance.
Profit Taking and Additional Purchases
In the event of a price increase, profits are promptly realized. Conversely, if prices go against the direction of the position, additional assets are acquired at discounted rates using the "smart sizing" limit order scaling method.
The placement of limit orders is guided by a mathematical formula derived from the previously discussed indicator readings. The distance covered to spread out these orders will depend on the specific assets being traded and the corresponding indicator values.
Rebound Sales
Assets are sold as prices change direction, with target profit levels determined by indicator readings and overall position size.
Efficient Trade Management
The "smart sizing" limit order scaling system is engineered to facilitate the effective management of large trade volumes while ensuring robust risk management practices. This approach employs a conservative use of leverage, which provides users with a substantial safety net. Additionally, it allows ample time for the implementation of further risk management strategies, should the need arise.
5. Strategy Direction
The strategy's direction is based on long-term market trends, using the "Pi cycle top and bottom indicator on the BTC global index" as a primary indicator.
The system adapts by closing current deals and switching strategy directions.
Pi cycle top and bottom indicator: The Pi Cycle Top and Bottom Bitcoin Indicator is a technical analysis tool used to identify potential market tops and bottoms in Bitcoin's price history. Here's a brief history of how it was developed and its application:
Concept and Development:
The Pi Cycle Top Indicator was created by Philip Swift, a cryptocurrency analyst. It was introduced in 2019 and is based on the observation that Bitcoin's price tops have historically aligned with specific moving averages crossing over each other.
The indicator uses two exponential moving averages (EMAs): the 111-day EMA and the 350-day EMA, which is multiplied by 2 (effectively the 700-day EMA). The "Pi" name comes from the mathematical constant π (pi), approximating 3.14, which represents the relationship between the two moving averages.
Functionality:
When the 111-day EMA crosses above the 350-day EMA (times 2), it signals a potential market top. Historically, this crossover has occurred near the peak of major Bitcoin bull markets.
The indicator gained popularity because it has successfully predicted the exact top or near the top in several major bull runs, including the 2013 and 2017 cycles.
Limitations:
While the Pi Cycle Top Indicator has been accurate in predicting market tops in the past, it is not infallible and should not be used in isolation. Market conditions change, and the indicator may not always provide timely or accurate signals.
Pi Cycle Bottom Indicator
Concept and Development:
The Pi Cycle Bottom Indicator is a relatively newer tool, also developed by Philip Swift. It was designed to complement the Pi Cycle Top Indicator by identifying potential market bottoms.
This indicator uses two different moving averages: the 471-day simple moving average (SMA) and the 150-day exponential moving average (EMA).
Functionality:
When the 150-day EMA crosses above the 471-day SMA, it signals a potential market bottom. Like the top indicator, this crossover has historically aligned with significant bottoms in Bitcoin's price.
Use Cases:
Traders and investors use the Pi Cycle Bottom Indicator to identify periods when Bitcoin might be undervalued or at the end of a bear market. It provides a data-driven signal that a recovery could be imminent.
Historical Performance
Pi Cycle Top:
The Pi Cycle Top Indicator successfully called the tops in April 2013, December 2013, and December 2017. However, it should be noted that in the 2021 cycle, it indicated a top in April, but Bitcoin continued to rise to a new all-time high in November, showing that the indicator may not always capture market nuances.
Pi Cycle Bottom:
The Pi Cycle Bottom Indicator has been less frequently discussed but has shown promise in identifying significant lows in Bitcoin's price history, such as the 2015 and 2018 bear market bottoms.
example of a bot with a long strategy stopping after the "Pi cycle" top indicator flashed.
example of a bot with a short strategy stopping after the "Pi cycle" bottom indicator flashed, followed by an example of a long strategy bot starting after the bottom flash.
6. Limit Order Scaling Dollar Cost Averaging (LOSDCA) Strategy
LOS-DCA (Limit Order Scaling Dollar Cost Averaging) involves systematically purchasing assets with a scaling rate applied to the order size.
This approach aims to average the purchase price as closely as possible to the current market price. By utilizing limit orders, our system can effectively manage entry points and mitigate the impact of sudden price fluctuations.
The scaling mechanism allows for adjustments in order sizes based on market conditions, ensuring that purchases occur at various price levels. This strategy not only helps in averaging down costs during market dips but also enhances potential gains when prices rise.
Overall, LOSDCA provides a structured method for building a position over time while managing risk effectively and helps the strategy harness the market's volatility but requires patience, as recovery times can vary.
Key points include:
Drawdowns: Periods of decline are common and should be expected.
Negative P&L: Temporary losses are part of the process, emphasizing the need for patience and continued investment.
When using LOSDCA, users should be aware that there's no guarantee the asset price will reach the "exit signal" (take-profit trigger) within a specific timeframe or at all.
Users must be comfortable with the risk of entering a position that could remain loss-making or only become profitable after an extended holding period.
Important!
When it comes to derivative strategies, users should be aware that, due to convexity and leverage, there is a price at which the position will be liquidated unless additional margin is added to the account, also known as a margin call.
This accounts for both the initial margin used and the effects of convexity.At cryptobots.io, we adopt a conservative approach to risk management by limiting leverage to a maximum of 1.5x out of 125x possible.
This conservative leverage level provides approximately a 40% safety net (measured from the average price) before additional margin is required to maintain the position.
7. Risk Management
Risks in automated trading include:
Black swan events
Stable coin de-peg
Exchange counterparty risk
Regulatory changes
Security breaches
Overextension of price decline.
Mitigation strategies include diversification, thorough risk assessments, and maintaining a funded margin account.
8. Understanding Derivatives
Derivatives offer exposure without owning the asset. cryptobots.io uses:
Inverse Perpetual Contracts/Swaps: For holding Bitcoin and buying USD-priced derivatives.
Linear Contracts: For USD collateralized trades.
Understanding the Unit of Account in Inverse Derivatives Trading:
When trading inverse derivatives contracts priced in USD with Bitcoin, Ether, or Solana as collateral, it's vital to grasp the concept of the unit of account. In this context, while the USD value of your collateral (BTC, ETH, or SOL) may fluctuate, the actual amount of cryptocurrency you hold remains constant.
9. Convexity and Leverage
Convexity, in this case, involves the relationship between futures and spot prices of the underlying asset when engaging in derivatives or swap trades.
Using Bitcoin as collateral for contracts priced in USD, can double leverage if the market moves against the trade by 50%. Cryptobots.io maintains conservative leverage limits to mitigate risk.
10. Counterparty Risks
Risks arise from exchanges and stable coins. Mitigation includes:
Using regulated, audited stable coins
Working with reputable exchanges
11. Emotional Management
The following are our recommendations to manage investment-related emotional stress:
Diversification: Consider diversifying your assets across different strategies, exchanges, assets, sectors, and asset classes. This strategy can mitigate risks and provide stability during market fluctuations. Our SPOT USD products can be part of this approach, which carries no liquidation risks.
Downsizing and Rebalancing: Reflect on the possibility of downsizing holdings you might consider heavily invested in. This involves reducing the size of your positions in assets that constitute a large portion of your portfolio. By doing so, you can mitigate the risk associated with over-concentration in a single asset or strategy.
At cryptobots.io, we understand the significant impact that emotions can have on investment decisions and overall well-being. Our commitment to transparency and your peace of mind is at the core of what we do.
Addressing the topic of emotions is important. Our objective is to provide you with a sense of security and control throughout your engagement with our service. We take any instance of emotional stress related to investments seriously, as it aligns with our goal of ensuring your well-being while engaging with our service.
In many cases, emotional reactions stem from over investment, and while managing substantial assets is a priority for us, the peace of mind of our users remains paramount—an ethos that extends to our own lives as well. This means we will always prefer that you downsize your investment and enhance your peace of mind rather than have a significant portion of your portfolio at risk.
It's not uncommon for clients to feel fear during fast-moving market moves due to a lack of comprehensive understanding of Bitcoin's historical data. This includes potential drawdown lengths and durations, their occurrence timelines, and associated probabilities throughout the market cycle.
The creators of the algorithm possess years of extensive research on this data, granting them a profound understanding that enables them to establish a strategy that boasts both safety, scalability, and performance. This strategy has been tailored to accommodate its viability in the future.
12. Legal and Regulatory Considerations
Cryptocurrency trading involves significant risk. cryptobots.io provides information and tools but does not offer personalized financial advice. Users should consult investment professionals and understand the associated risks before trading.
Do you need more information?
Explore these resources:
FAQ: Quick answers to common questions.
Setup Guide: Step-by-step instructions for new users.
Strategy Guides: Detailed explanations of our trading products.
Exchanges: Explore our supported list of exchanges.
Bot Explorer: Select and activate your preferred strategy.
API Key Guides: Learn to generate and manage API keys.
Trading Guidelines: Understand our policies and expectations.
Automated Trading Guide: Insights on mechanics and risks.
All about cryptobots.io: Learn about our company and mission.
Profit Share: Manage your earnings and payments.
Affiliate Network: Track your referrals and commissions.
My Bots: Monitor your active trades and their performance.
In-app Help: Access tutorial videos and help guides.
Glossary: Definitions for cryptocurrency and trading terms.