The deadliest sin of algo trader

…is Greed. Personally, I found that greed is the main cause of failure of many strategies that attempted to survive long-term in the algo crypto trading world. I’m specifically talking about the target profit greed. Over the past 3 years I’m active in this trading world, I have seen people throwing ridiculous profit target. 1% per day, 50% per month, or even 100% in a week.

Let’s take the 1% per day profit target as example. Seems like a small number right? Seems like a realistic target. Now let’s create a spreadsheet to show the simulated profit gain over 365 days if you really able to get 1% profit a day and do compounding stake. In summary, you will get:

• 100% profit on day 70
• 200% profit on day 111
• 300% profit on day 140
• 3,678% profit after a year

Now let’s compare it to the low-risk product that a local bank can offer you. Let’s take the data from this site for example. Assume you live in Argentina. That means you can get maximum of 32.6% profit per year, which means your bot’s profit target is 112 times what a local bank in Argentina can offer. If it’s really that easy to achieve such high profit on algo trading, all local banks in argentina and the rest of the worlds would already be closed by now. Who would want to put their money into local banks if trading can give such massive profit?

My advice to you is to set realistic profit target that is easily reachable. A good profit target is twice of max interest rate that your local bank offers. So for example, the max deposit rate in my country is 5%. If my strategy can give me 10% profit in a year, that’s good enough. Anything above that can be considered as bonus point, but my target should be that 10% per year.

Why do realistic profit target matters? Because it will affect the quality of entries and exits of the strategy. When you are chasing that 3,678% profit, you will want to have as many number of trades as possible, which means you will accept “slightly bad” entries to boost the trade numbers. You also have the same issue on exits. Because you are chasing the high profit, you will want to have high profit for each trades, which means you will try to exit as late as possible.

In contrast, when you set a low profit target, you will focus on good-to-best entries. You also won’t have issue in exiting trades earlier and accept guaranteed low profit than trying to catch unguaranteed higher profit. From my experience, this approach works better for long-term performance.

To end this post, let’s see how much daily profit is needed to reach the 10% profit per year. As you can see in the linked spreadsheet above, to reach 10% profit a year, all you need is 0.027% profit daily. That’s all you need to beat your local bank.