Cryptocurrency bot development is a fast-growing industry. There has been a need for automated crypto trading in recent years to keep up with the market. First, cryptocurrencies are highly volatile, prices fluctuate in seconds and minutes. Therefore, investors are unable to react fast enough to price changes to take advantage of the available trades.
Compared to traditional stock markets, cryptocurrency is different because it never stops trading, making it harder for an investor to keep track of market fluctuations, diversify risk, reduce human error and increase trading discipline to 24/7, 365 days a year. It is nearly impossible to dedicate the required time to monitor cryptocurrency exchanges around the world. Therefore human cryptocurrency trading is highly limited in a lot of ways. This is why Trading bots come into the picture.
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What are crypto trading bots?
Crypto trading bots are generally programs designed to automate cryptocurrency trading; they replace human cryptocurrency trading. In human cryptocurrency trading, the investor does the analysis and interpretation of market statistics. However, with crypto trading bots, the program gathers market data, analyzes and interprets it, calculates the risk involved, and executes either a trade either selling or buying cryptocurrency assets.
In other words, it is like hiring a competent worker to do all the work while you sit back and enjoy the profits. Setting up a crypto bot requires you to give it instructions, for instance, to buy more bitcoin when the prices are lower than a specific limit. These trading bots help save investors time and are more economical compared to hiring human experts.
How to use bots for trading
First, an investor looks for the crypto trading bots that are more useful in their trade and download the code from the developer. There are free trading bots, however many have user fees, which is sometimes excessive. Each bot comes with specific software and hardware requirements. Bots have proved to be extremely useful in crypto trading, although the discussion of their legality in crypto trading remains. To make the best use of trading bots, an investor must have their accounts well set up across digital currency exchanges and must-have cryptocurrency holdings. The investor is still in charge of making any major decisions such as when to buy or sell. A crypto trading bot is not a get-rich-quick scheme for lazy investors; time and effort are still required from the human counterpart for success.
Bots use your preset conditions to trade; their work is divided into three main stages: signal generator, risk allocation, and execution.
● Signal generator:
The signal generator works to make predictions and identify possible trades by collecting and analyzing market data and using technical analysis indicators. In this stage, raw market data is collected from different sources. The investor decides what type of data goes into the signal generator.
● Risk allocation:
In this stage, the trading bot distributes risk according to the investor’s preset parameters and rules. These rules include what percentage of the capital will be allocated to trading. The bot calculates potential risks and decides the amount to be traded.
● Execution:
This is the stage where actual cryptocurrency trading takes place based on the signal generated from analyzing market data. The signals are converted into API key requests that the system can process. With trading bots, the trades are conducted fast and efficiently, contain fewer errors, and remove emotion from the trade.
What are the cryptocurrency strategies?
A crypto trading bot is fed with strategies that help tweak the bot to react to any situation. A trading strategy enables investors to get more money using less capital. Here are some of the widely used cryptocurrency strategies;
1. Trend following strategy:
In this strategy, the bot is programmed to identify current market trends and execute trades based on these trends. The trend-following strategy attempts to analyze an asset’s momentum towards a specific direction. Traders using this strategy find themselves in a long position when the crypto trends upwards and a short position when the asset trends downwards.
2. Arbitrage:
The strategy that takes advantage of the price difference between cryptocurrencies. The trader buys digital assets from one market and sells them to another, making a profit in the process. Traders would make a lot of money in the past when the price difference between these digital assets was spread apart, however, in recent years, the gap has tightened up.
3. Market making:
In this strategy, the bot executes continuous buying and selling on several spot cryptocurrencies and digital derivatives contracts to make use of the spread between the buy and sell price. Usually, the trader places limit orders for both buy and sell and the bot will place limit orders to profit from the spread.
Where to get crypto-trading bots
The cryptocurrency market is growing exponentially and so is the number of bots. The best trading bots are very expensive to buy or offered as subscriptions. Nonetheless, you can still get free trading bot software from open-source platforms such as 3commas. The platform offers a crypto trading bot that works well with Bitfinex, Binance, Bitstamp, Huobi, etc. with an open-source trading bot, one can trade throughout the day and even emulate successful strategies used by top traders.
So, do trading bots work? In one word yes! Many wall street companies have been using algorithmic trading for a long time. As a matter of fact, within the past year, bot trading has taken over the industry. The relevant question here should be, how well do these bots work? The effectiveness of algorithmic trading depends on your choice of platform and bots as well as the investor’s level of expertise and experience.
Advantages of crypto trading bots
● More powerful:
The human brain is limited when it comes to the amount of data that it can process at one time. These bots handle a large amount of data and get useful insights to be used in trading.
● Efficient:
Bots provide a seamless, error-free, and fast solution to crypto trading. Once the bot collects the correct information and has been fed with good strategies, its trade is more likely to end in a profit.
● Emotionless:
Crypto trading bots take the emotion out of trading, eliminating feelings of fear of loss and greed of profit. Traders, especially beginners, struggle to make rational decisions.
Disadvantages of crypto trading bots
Crypto trading bots do not work efficiently in a highly volatile environment, where market prediction is likely to fail. For instance, uncertain times brought on by covid-19 have had a significant effect on the market and it is difficult to predict the effect on the economy. Therefore, there is a need for human input where you can trust your instincts to conduct the trade.
There exist many trading bots but not all are efficient. Issues such as programming errors can render a bot useless and lead to loss. Before investing in trading bots, one should make sure that they have in-depth knowledge of digital currency markets and a sensible investment plan.
In conclusion, crypto trading bots are highly recommended to traders for obvious reasons, however, using these bots requires careful implementation and patience