FAQ

This FAQ is designed to help you better understand our trading bots. For a list of example bots and their corresponding data, please click here.

What do the bots trade?

The bots trade perpetual futures contracts. These derivatives allow speculation on the price movements of assets like cryptocurrencies, without an expiration date. Unlike spot markets where you can only profit when the asset's price rises, perpetual futures markets allow for both long and short positions. This means traders can attempt to profit from both rising and falling markets. Additionally, opening a position in these futures markets typically involves only a small commission, as opposed to the full value payment required in spot trading.

What are 'long' and 'short' positions? How does the bot profit even in declining markets? Can a bot incur loss?

Long Positions: Taking a long position means the bot buys a contract expecting the asset's price to increase. Profit is realized if price increases, and the bot sells the contract at a higher price.

Short Positions: Conversely, a short position involves selling a contract with the anticipation that the asset's price will decrease. Profit is made if price decreases, and the bot buys back the contract at a lower price.

Profit and Loss: Profits occur when the bot accurately predicts market movements, selling at a higher price in long positions, or buying back at a lower price in short positions. Losses happen when the market moves in the opposite direction of the bot's position and the bot closes the position at a loss.

Why would a bot need to close a loss-making position, why not keep it open until it turns profit?

When a bot opens a position in the perpetual futures market, it must account for unrealized losses and their impact on the capital in the account as well as the risk of liquidation:

Unrealized Losses and Liquidation: When a position moves against the bot's trade, it starts to incur unrealized losses. These are losses that have occurred on paper but haven't been locked in because the position is still open. Even though these losses are not yet realized, they directly affect the capital of the trading account. The trading account must have enough capital to cover these unrealized losses. If the unrealized losses grow to a point where the capital is insufficient to maintain the position, the exchange forcibly closes the position at the current market price to prevent the account from going into negative. This is called liquidation. In this event all capital will be lost.

To avoid liquidation, all bots are modelled with stop losses in place. A stop loss is a set of conditions at which the bot will automatically close a position to prevent further possible losses. When the market price reaches conditions for a stop loss, the position is closed, and the unrealized losses become realized losses. However, this action is necessary to ensure that the account has sufficient capital to continue trading and to avoid complete depletion of funds through liquidation. The use of stop losses thus serves as a protective measure, ensuring that the bot can withstand adverse market movements without endangering the entirety of the account's capital. Additionally, maintaining disciplined use of stop losses allows the bot to cut losses short while leaving the potential to capture profits on other trades. It is a cornerstone of responsible trading practices, helping to balance the pursuit of profit with the imperative of capital preservation.

When examining the bots available, you can see that some bots incur many stop losses until they attain a highly profitable trade, while others attain many small profitable trades and occasionally incur relatively large stop losses.

What are the different risk levels presented together with available bots?

The different risk levels refer to the amount of capital used to buffer against potential losses when trading. The relation of these risk levels to your capital is straightforward: the more capital you have in your account, the less likely your account will be liquidated, as you can withstand larger unrealized losses or a larger number of stop losses. However, lower risk levels also mean the potential percentage returns on that capital may be lower, as the size of the positions used in trading will be smaller relative to the capital. It's crucial to align this choice with your personal risk appetite. The risk level is usually tied to either the maximum drawdown amount the strategy has incurred, or the maximum possible stop loss associated with the strategy at current price levels. Maximum drawdown is the most significant single drop from a peak to bottom of your capital before a new peak is achieved. It is used to gauge the highest amount of loss that an investment has suffered from a high point to a subsequent low point. Markets have experienced some extreme events in the past and these drawdowns are usually results of those extreme events.

High Risk Level: At this level, you're prepared to incur the strategy's maximum historical drawdown adjusted to current prices. Your capital is sufficient to sustain this potential loss without liquidation. If this drawdown event happens in the beginning of your bot journey you might not have enough capital left in your account to continue trading, so you either need to top up capital, or stop the bot, or get liquidated. If this level of drawdown happens not at the beginning but down the line, the bot might have generated enough profit to sustain itself, so even if it occurs, the bot can continue running uninterrupted.

Medium Risk Level: Here, you have a buffer greater than the maximum drawdown, providing a cushion against a large drawdown event. The buffer might be set at, for example, 100% more capital than what the high-risk level would require. This mitigates the risk to some extent but also reduces the trade size, which may lower the percentage returns.

Low Risk Level: The lowest risk setting requires the most considerable capital buffer, sometimes up to 200% more than what is needed at the high-risk level. This is designed to safeguard against extreme drawdowns worse than what’s seen historically or the maximum conceivable stop loss at current prices, depending on strategy. It offers the most protection but typically results in the smallest percentage gains relative to the account size.

There are two main mechanisms that may deplete your capital. For strategies where there are rare and large stop losses, you might incur early or much more than expected stop losses. For strategies where there are many stop losses and fewer large profitable trades, the bots might not be able to find enough profitable trades to cover the stop losses.

Capital Preservation: By adjusting the risk level, you manage the trade-off between potential returns and capital preservation. A more significant capital buffer helps protect against liquidation but also means that the capital gains on successful trades will be a smaller percentage of your overall account.

In the below charts we are displaying different types of strategies and the concepts mentioned here.