The 24/7 cryptocurrency market is fast-paced and extremely volatile; managing your trading can be challenging. For this reason, many crypto traders who have limited free time to sit in front of a screen and monitor opportunities in the industry choose to use a cryptocurrency auto trading bot.
However, using trading bots in the financial industry is a long-established and legitimate activity – and it’s now accessible in the cryptocurrency markets. By harnessing bot trading in cryptocurrency, investors can access a wide range of trading strategies. HFT, for example, prompts the use of software because it involves high-speed trades.
This article gives you a detailed guide about Bitcoin and cryptocurrency trading bots – from what they are and how they work.
What are Crypto Trading Bots?
Cryptocurrency trading bots are software applications that automatically buy and sell digital assets according to preset parameters. Crypto trading bots use APIs (Application Programming Interfaces) to connect to exchanges and retrieve data to make trades. They can operate on different timeframes – from making multiple trades per day to holding positions for weeks or longer.
It’s not an entirely new development. After making a reported $150,000 profit using scripted trading bots to buy and sell Bitcoin, finance worker Joseph Lee launched the trading platform BTC.sx in 2013.
Lee’s first bot was straightforward: it scanned different trading platforms for price differences to exploit, and when it found one, it automatically bought Bitcoin on one platform and sold it on the other. Profits were minimal. Lee explained on a Bitcoin forum in 2012 that “profitability on overall trading volume is a few percent at best.”
How Do Crypto Trading Bots Work?
Today, the bots that take advantage of opportunities are more sophisticated. Some bots base their rules on an “exponential moving average.” They examine how markets typically behave over specific periods and take action when those thresholds are compromised.
For instance, if the value of Bitcoin falls further than usual, for example, a predictive algorithm would anticipate a quick rebound and place buy orders. On the other hand, a reactive algorithm would begin selling to reduce losses.
These strategies are legal, so while bots can alleviate some of the stress of rapid cryptocurrency trading, they cannot replace thought and analysis. The trader must still determine how the asset is likely to behave and whether they want to be defensive or aggressive.
Trading bots provide superior speed, efficiency, productivity (few errors), and emotionless trading. You must grant a trading bot access to your account via API keys (Application Program Interface).
Trading bots operate in three stages: signal creator, risk allocation, and execution.
- The signal generator essentially does the trader’s job, predicting and identifying potential trades based on market data and technical analysis indicators.
- As the name implies, risk allocation is the process by which the bot distributes risk based on a specific set of parameters and rules established by the trader, which typically includes how and to what extent capital gets allocated when trading.
- It’s time to get started. Execution is how cryptocurrencies are purchased and sold based on the signals generated by the pre-configured trading system. The signals get converted into API key requests that the crypto exchange can understand and process at this point.
Additionally, some bots can employ more complex trading strategies. The algorithm can use the most recent historical data, indicators, and signals to navigate. While placing orders, high-quality crypto bots consider over a hundred parameters.
The algorithm in some programs does not change, but some bots can be connected or customized with different settings. This option is appropriate for experienced traders with their trading strategies and preferences.
Some bots also offer trading simulation features, which allow you to test out different strategies before putting real money on the line.
Advantages of Crypto Trading Bots
There are several advantages to using a bot for cryptocurrency trading. They include;
- Speed– Bots can execute trades much faster than humans. Even seasoned traders require time to analyze the market. Beginners move at a much slower pace. As a result, traders can lose some trading opportunities. Many traders prefer to use bots to avoid such situations because they analyze everything and make decisions faster than humans. They can also place orders almost instantaneously after detecting a trading opportunity.
- Error-free– In the process of market analysis, a person can make mistakes. This could be caused by the trader’s level of training or psychological state. But, bots operate within the parameters of the algorithm. If a signal is available, the bitcoin trading bot will use it. They strictly follow the trading plan. As a result, they rarely make mistakes.
- Emotionless– bots do not experience human emotions such as greed, fear, or euphoria. They make decisions based on data and not emotions. This is very important in trading because emotions can cloud judgment.
- Consistency– it can be challenging to stick to a trading plan in the heat of the moment. But, a bot will consistently execute the plan.
- Trading 24/7– Bots never get tired and can work for prolonged periods without breaks. It is essential in fast-moving markets where opportunistic trades must be quickly made.
- Managing several accounts– Crypto trading bots are also handy for managing multiple accounts simultaneously. Some bots can trade on various exchanges and with different currencies. So, if you have several accounts, the bot can handle all of them.
Disadvantages of Using Crypto Bots
There are a few drawbacks that you should be aware of before using a bot for trading. These include;
- They require monitoring– Even though bots can trade automatically, they still need to be monitored. Things can go wrong, such as connection issues, power outages, and software updates.
- They are not free– good crypto bots will usually come with a price tag. Some bots can be expensive, and you need to factor in the cost before using one.
- They are not foolproof– despite their many advantages, bots are not perfect—developers program bots with specific codes and algorithms that allow them to function. During the development process, mistakes can occur, rendering the bot inefficient at particular points in time. So, you need to be aware of this before using a bot for trading.
How Can You Get a Crypto Bot
There are three ways to obtain bots for crypto trading coins:
Making a Bot From the Ground Up
This bot is best suited for those who are already familiar with programming. All bots are explicitly made for some exchange. As a result, the platform must provide an API– a collection of information about the current trading state and functions that allow you to begin trading based on user-defined parameters.
Using a Bot-building Platform
This technique is best suited for those who are not familiar with programming. Bot-building platforms allow you to create a bot without any coding. You can use the platform to test your bot and see how it performs on various exchanges.
Buying a Crypto Trading Bot
This is the quickest means to get a bot. You can find many bots for sale online. However, it’s essential to be careful when buying a bot because there are many scams. It would be best if you only purchased from a reputable source.
Downloading a Crypto Trading Bot
The final option is to obtain free bots. The benefits of this option include eliminating the need to invent anything, write programs, or pay money. However, you cannot be confident that the bot will not begin, for example, transferring all earnings to third-party internal accounts.
Crypto Trading Bots
With all that discussed, let’s look at some of the best crypto trading bots.
Pionex Trading Bot– Pionex is a fantastic cryptocurrency exchange with over 120+ cryptocurrencies and 16 free trading bots built-in. It is straightforward to use for beginners, with detailed tutorials on each bot so you can become acquainted with each one and determine which is best for your needs.
There is no need to connect the bots to any exchange because everything is ready to go when you open your free Pionex account. The only disadvantage of Pionex is that it does not accept fiat deposits or withdrawals.
Trality Trading Bot– Trality is a one-of-a-kind offering in the bot market. Rather than providing pre-programmed bots, Trality gives you the tools and flexibility to create and fine-tune your bots based on your preferred trading strategies. It is appropriate for both newcomers and advanced traders, those with no coding experience and Python coding gurus – and everyone in between.
Bitsgap Trading Bot– Bitsgap is a more recent automated trading bot that demonstrates the enhanced functionality of a modern, well-designed bot. Bitsgap’s highly advanced, the in-built algorithm includes features that appeal to both new and experienced users: automated trading.
Suppose you want a more personalized experience with your trading strategies. In that case, the bot provides the necessary signals to keep users informed of potential investments with the highest chances of short-term and long-term returns.
Bot trading is not a one-and-done proposition. You don’t just leave it alone for long periods. You need to constantly monitor your bot’s activity and how it is performing. You also need to have a superb understanding of the market to succeed.
Whether you decide to robotize your trades or not, the primary rules apply: don’t trade more than you can afford to lose. Also, don’t make any investment unless you have a basic understanding of what you’re doing.