Last updated on January 4th, 2021 at 08:23 pm | This article was published at an earlier date and has been updated with new information.
Cryptocurrency Trading Bot: How To Choose And Should You Trust Them? – This has been the most frequently asked question by online crypto lovers. Nevertheless, if this is your question as well, this is the best place for you. Cryptocurrency Trading Bot has so many advantages. In this article, you will know what a Trading bot all about, and also, you will know why it should be used.
The cryptocurrency market has been experiencing an incredible bull run in 2020, amid the coronavirus crisis. In these troubled times, investors buy bitcoins massively to secure their funds and make profits.
And while cryptocurrencies have shown to be an excellent way to store value, they are also quite volatile. Their prices can dramatically increase or decrease within minutes, which opens some incredible trading opportunities for the savvy traders out there.
However, unlike stock markets or forex, cryptocurrency markets are open 24/7, making it difficult for traders to exploit every opportunity to make profits.
That’s where trading bots come into play. In this article, we will explain the basics behind trading bots, their purpose, and the key characteristics to look for when choosing a bot that can do your trading for you.
What are Trading bots?
Cryptocurrency trading bots are software programs that automatically buy and sell cryptocurrencies at the right time on the behalf of the trader. Their goal is to generate as much profit as possible for their users, with minimal intervention.
To do this, bots monitor the cryptocurrency markets 24/7 and follow a predetermined set of rules and strategies that users can set up in the background. They analyze the market following various parameters to finally determine the best moment to enter (buy) or exit (sell) the market.
Thanks to the rising popularity of cryptocurrencies, there are now a wide variety of platforms that cater to the different needs of the diverse crypto trading and investor community.
There are different types of bots that can be found on the market:
- Arbitrage bots – which analyze different markets simultaneously and take advantage of the price discrepancies between them to make profits.
- Spot trading bots – which analyze historical price data and trade coins following trading indicators such as volume, orders, price, and time.
- Market making bots – which continuously buy and sell crypto to exploit the spread between the buy and sell price as the price fluctuates.
Some of these platforms are designed for experienced traders and require extensive trading knowledge of indicators and strategies to be used to their fullest potential. Others offer “social trading” where beginners can clone or copy trade signals from more experienced traders.
That being said, most trading cryptocurrency bots include some overlapping features, listed below.
Common trading bot features
Cryptocurrency bots often have these common characteristics:
- Strategy implementation – The first step of using a cryptocurrency trading bot is the implementation of the strategy. This way, traders can tell the software which coin to trade when to enter the market, and what kind of strategy to follow.
- Backtesting – After implementing a strategy, bots usually let you test these parameters against historical market data. By backtesting, bots can see how your trade would have performed on a similar setup in the past. That way, you don’t need to simulate your trading to see if it’s going to work out or not.
- Execution – Bots use an API to send the signal to your cryptocurrency account on the desired exchange and trade on your behalf. These APIs can only send buy, sell, and stop-loss signals, and cannot communicate with your account for other actions (such as withdrawals).
- Scheduling – Finally, bots allow the user to schedule their activities. For instance, they can be set up to activate automatically at different times of the day or deactivate once they have achieved a certain amount of profits for the account.
When to use a trading bot
While handy and practical, cryptocurrency trading bots cannot replace manual trading. If you aren’t careful, they can even lose more money and more quickly than manually.
So, trading automation doesn’t mean completely hands-off. You still need to do your due diligence, research the coins, and learn the right strategies for the right situations.
Cryptocurrency bots are not get-rich-quick schemes, but a tool for traders to convert their thorough market research into successful trades that would be impossible to do manually.
- Bots return marginal returns, even when used correctly. When used incorrectly, they can result in significant capital loss.
- Some bots are not well programmed, and beginners can hardly see the difference between good and bad software.
- Unless you are using a social trading bot, setting up a successful cryptocurrency trading automaton requires deep knowledge of the markets and trading strategies.
To summarize, cryptocurrency trading bots are excellent tools for traders to exploit the volatility of the cryptocurrency market. They can alleviate a lot of the stress, tedium, and boredom from manual trading.
Simply put, they allow traders to:
- Buy and sell cryptocurrencies 24/7
- Test strategies before deploying them
- Automate tedious and time-consuming tasks
- Copy trades from experienced traders
That being said, even beginner-friendly trading platforms require some trading knowledge to be used optimally. Your first step to success is to understand that bots aren’t a one-size-fits-all solution. They can’t magically start making profits for you if you aren’t an experienced trader, to begin with.