Mizar | Panic Selling: Handling bear markets with DCA bots.
Wait it Out or Panic Sell? Handling bear markets with DCA bots.
So the market has been red — and you have some deals sitting there that you’re worried about. You suddenly get the urge to have a new deal open and close, but you don’t want too tie up more capital. Should you market sell now and just restart? Well let’s discuss that.
Purpose of the strategy
The biggest thing to remember is that in order to understand how good — or bad — a strategy is doing, you have to understand the purpose of a strategy. If we’re talking DCA bots, then the strategy is to buy in more when the price goes down in order to average out our entry and get the deal closed faster and for more profit.
So, when we have big red positions that’s not necessarily a bad thing, or at least, it’s not as bad of a position to be in if you didn’t have a DCA strategy from the start.
In essence — Relax. Our natural inclination when we see a big red deal is too think “that’s bad” — but from a DCA perspective it’s less an issue and more an opportunity.
To Panic Sell or not?
Back to the main question: Should we Panic Sell some of these red deals? Well usually no.
As we established earlier: a DCA strategy is intended to buy in as the price drops, leading to a bigger close and more profit in the long run. Panic closing when we have a big red bag is doing the opposite and will lead to a net loss in the long run most of the time as you are closing deals that have maximum volume at a high loss, in order to get small volume deals closing at a small gain.
This means that we’re maximising our risk (losses) and minimising our reward (gains) by panic selling DCA strategies at the bottom.
But what’s the alternative? As mentioned in our previous articles — it’s important to have a diverse portfolio and equally important to not have market exposure for your entire portfolio at any one time. If we set ourselves up to succeed early then we can use free capital at times like this — and edit the individual deals to increase the maximum number of Safety Orders, allowing us to average out the buy price by even larger amounts and get the deals closed quicker. As deals close more capital will be freed up, at which point you can let the bot open new deals or continue to increase the number of maximum SO’s on the open deals until they close out.
A second option is to leave the deals we have as is, and use the fresh capital to increase the amount of active deals the bot can run. This will allow us to start opening new deals and make some more profit while the old deals close.
But what if we’ve thrown caution to the wind and are fully tied up in the DCA deals? Well the best option is almost always to wait it out — it’s tough and you’ll want to be active on the market as it rebounds, but you’re overexposed as is.
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