Crypto trading may seem challenging. Even experienced investors would sometimes find it hard to make informed trading decisions. They say traders should set aside their emotions to make sound decisions. Fortunately, there is an easy way out—a crypto trading bot. When properly configured, crypto trading bots can deliver impressive returns while requiring less effort from the investor. Let’s discuss what they are and how they work.
What are crypto trading bots?
Crypto trading bots are automated trading systems that facilitate crypto trading by simplifying the investing process. They are well-systematized and hardly make errors. Bots work out well for the crypto market, which is known for wild price swings.
Crypto trading bots follow a basic principle. They are software programs that use artificial intelligence to perform functions based on predefined criteria. There will be no more missed trades or opportunities. Bots will help you invest in the most undervalued crypto or to add additional crypto coins to your portfolio. Besides, they help you buy, sell, or hold assets quickly and efficiently at any time of the day or night.
How do crypto trading bots work?
Most trading bots share a few common characteristics:
- Market data analysis: The bot module will save and interpret raw market data from various sources. It will also decide whether to buy or sell a specific crypto asset.
- Market risk prediction: Unlike other bots, these use market data to calculate the market’s potential risk.
- Buying/selling assets: The bot module employs APIs (Application Programming Interface) to systematically buy and sell crypto assets.
The role of algorithm bots in crypto trading
Traders use bots for several reasons, efficiency being the foremost.
Increasing efficiency and profitability through automation
Automated trading is having software or a platform to complete tasks and trade orders on your behalf. Automated trading is for traders who want to make more money but lack the skills required for trading. Trading bots use powerful algorithms to trade crypto across various exchanges, allowing you to earn even under unpredictable market conditions. You can tailor your trading experience and execute it automatically using various tools.
Utilizing machine learning for predictive trading strategies
Machine learning enables traders to speed up and automate one of the trickiest, most time-consuming, and most difficult components of algorithmic trading, giving them an edge over rules-based trading. You can find various machine-learning algorithms suited for different user applications.
Overcoming emotional bias in trading decisions
Estimates say more than 80% of private traders lose money. Trading volatile crypto is emotional labor, and emotions often lead to mistakes in judgment. Our emotional state can affect up to 39% of manual trades, leading us to make illogical decisions. It’s just basic human psychology. On the other hand, the 20% of skilled traders who make money do so by using trading bots to ensure a non-emotional, systematic approach to trading.
24/7 monitoring and execution of trades
Exchanges worldwide offer services 24/7, but asset prices can change anytime, making it difficult to track in odd hours. Here, a trading bot can help by automating your methods. The next stage is to put it into action in real-time. The logic you hardcoded into the bot will now be transformed into API queries that the exchange can comprehend. Some bots even let you test your technique in real time with fictitious money.
Types of crypto trading bots
Top crypto trading bots are highly configurable, allowing you to change the algorithm based on your long- or short-term trading goals. Here are some of the most popular types of crypto bots.
The bots have the arbitrage approach hardcoded into them. Blackbird is one of the market’s best arbitrage bots. The Blackbird Bitcoin Arbitrage is a C++ trading system that performs long/short arbitrage among Bitcoin exchanges. While the code does need some effort, it is free to use.
Market making is purchasing and selling an item to profit from the spread or difference between the ask and bid prices. Traders employ market-making bots to offer liquidity, which boosts confidence in the crypto ecosystem. Market-making trading bots always look for markets with greater spread to make money for investors. You can profit from ask and bid prices by modifying your market-making bot to suit a specific asset.
Algorithmic trading bots
An algorithmic trading bot is a code-driven “software” that generates and executes market buy-and-sell signals. The key components of these bots are rules that indicate when to buy or sell, when to close the position and rules that determine order size and portfolio allocation. Trality is one of the most effective tools for developing these algorithmic trading bots.
Traders use Trality’s easy and all-in-one cloud-based ecosystem to construct bots and automate their trades.
Technical trading bots
The vast majority of bots now in use are technical trading bots. These trading bots use known technical indicators and signals to estimate future price movements of a coin to generate profits. Most technical trading bots integrate social and signal trading, allowing you to mimic successful traders’ transactions.
Profile automation bots
Instead of active trading, these bots will assist their users in creating, obtaining, and maintaining their desired profiles. Users utilize these bots to automate as many tedious, repetitive operations as possible. HoldBot is an excellent example of a profile automation bot.
Pros & cons of crypto trading bots
To help you decide if a trading bot is a right tool, we list some of the primary benefits and drawbacks of employing a crypto bot.
- Trading bots in crypto can save you time.
- They cover many coins and exchanges (if an arbitration bot is used).
- Traders can now deal with crypto analysis and trade more swiftly.
- They might serve as a reference book on various trading tactics for inexperienced traders.
- We can observe how they function and gain fresh insights.
- An automated trading bot cannot perform a thorough examination.
- The program follows an algorithm. It lacks intuition. It cannot change its behavior on its own.
- A person is more adaptable. The program includes a trading bot’s appraisal of the circumstance while a person can gather information from the outer world.
- Correct analysis can play both a harmful and helpful role during atypical situations.
- Bots can occasionally hang, lag, and crash. Because no one is immune, the trader must regularly examine the bot’s performance.
As we have seen, a crypto trading bot does not follow a “one-size-fits-all” strategy. It would help if you thoroughly researched them before settling on a bot that meets your needs.
Can algorithm bots be used for long-term investing?
Yes, algorithm bots can be used for long-term investing. However, their effectiveness depends on the algorithm’s design, adaptability, and market conditions. Regular monitoring and adjustments are crucial for sustained success.
Are algorithm bots risk-free?
No, algorithm bots are not risk-free. They can make errors, misinterpret market conditions, and incur losses. Thorough testing, risk management, and human oversight are necessary to mitigate risks associated with algorithmic trading.
How do algorithm bots enhance crypto trading?
Algorithm bots enhance crypto trading by automating tasks, executing trades swiftly, and reacting to market data in real-time. They can analyze large amounts of data, implement complex strategies, and operate 24/7, improving efficiency and potentially capturing opportunities in the volatile crypto market.
How do I monitor the performance of an algorithm bot?
Monitor algorithm bot by reviewing trades, comparing to benchmarks, analyzing metrics like drawdowns, adjusting strategies, and using provided reporting tools for consistent optimization.
What are the benefits of crypto trading bots?
As bots can operate around the clock and execute trades quickly, they can take advantage of market opportunities and execute trades faster than a human trader.
What is the best trading bot for crypto?
3Commas is arguably the best crypto bot though individual preferences influence the choice.
How do algorithmic bots work?
The algorithmic trading bots trade at high speeds and desirable volumes based on market conditions.