Markets are difficult to predict. Crypto markets are extremely volatile. Having a bot running can work well in your favour if configured correctly and the market conditions are similar as to what you backtested on.
However, what if the market you traded on ended up going against your prediction and trended in the opposite direction? If you’re going to run a bot strategy, we recommend that you run multiple bots at the same time in order to diversify your portfolio. For example, if a particular market has a sudden crash like the Luna coin or the recent collapse of some exchange coins, then that bot will result in a loss and trigger the stop-loss if you have it set.
There is no 100% safe way to trade, therefore any hedging strategy mentioned here will simply reduce your risk of a total loss and allow you to benefit from a reverse of the original market movement.
Crypto markets tend to be correlated in the long run and most coins will move in the same direction over longer periods of time. However, over short periods of time, you will find that coins with more liquidity and a higher market cap (Bitcoin/ Ethereum) will be less volatile than coins that are newer, less established and have a lower market cap such as SAND/MANA.
There are a few strategies you can try to ensure you are well-hedged:
Consider the market you wish to trade on. Simulate a long trend bot, then a short trend bot, and a ping pong bot over the same period. Have a look at the general trend of that period. If it was going up, did a long trend bot perform better than a ping pong bot? What about the short trend bot? If you had ran 2 bots at the same time, would you have been in an overall profit at the end of the period?
Now take 2 coin pairs in a similar industry such as SAND and MANA (they are both Metaverse coins), and run the same back tests for the 3 bot types over the same period. Did they yield similar results? If you had a long trend bot on SAND and a short trend bot on MANA would you have been profitable overall?
Take a volatile coin such as ATOM and run a long trend back test on it. Then run a ping pong back test on a more stable crypto like Bitcoin or Ethereum over the same period. Consider your results there and see if it would make sense to run both bots during the same period.
When analysing the results of the above scenarios, pay particular attention to the drawdown periods. These are periods when you would have potentially made some losses on your bot (because the market shifted too quickly or traded out of range for a long period). If one of them made a loss, how did the other perform? Did you see a gain because you were using an opposing strategy?
Hedging is never perfect and there are still risks. Hedging can also take away from of your profits because one of the markets will likely go against the bot. However, over longer periods of time, hedging might save you from large losses. With experience, you will become more familiar with market conditions and know when to hedge. It might be that you start hedging after a bot has gone against your predicted trend.