The cryptocurrency market is well known for its volatile nature. It is also known for being very unforgiving if you don’t see what you are doing. In your crypto journey, you will hear these words again and again that are: “Do your due diligence and always do proper analysis before entering into any trade.” If you are a novice trader or an experienced one, one thing you would have certainly noted by now is that the crypto market, due to its volatile nature, doesn’t allow you to keep your eyes away from it.
Many traders have rued their luck on missing a profitable trade simply because they weren’t available at that particular time when the market made a sudden rise or fall. The reason can be anything. You were busy running your errands, busy at work if you are not a full-time crypto trader, busy enjoying your vacations and don’t want to stick to the screens 24/7, or simply because you were tired and called it a day and went to sleep.
While these are very reasonable reasons to stay out of the market for a small amount of time, certain opportunities come and go when you are not following the trends of the market. You would feel like there should be some automated tool that would carry out your trading activities for you. But does such automation exist, and how can you benefit from it? The good news is that there are several bot trading software available to download and integrate with your exchange.
You can define your parameters for a trade that you wish for the software to follow, take some time off the crypto market, and enjoy some hard-earned quality time for yourself. These trading bots help make quick decisions in an ever-changing crypto market. They also help you in reaching your required targets by initiating processes at the right time that you are probable to miss due to any number of circumstances.
How do Crypto Trading Bots work?
The primary functionality of a crypto trading bot is to gather information from various sources, which, at the time of collection, looks random, not classified, and disorganized. The task of the trading bot is to make sense of this randomized data. The trading bots are essentially software that is programmed with strategies to classify the random data into actionable trading signals.
The data gathered by the trading bots can be collected at run time, or it can be historical data of the past. Once the trading bots get an actionable trading signal, they decide their next step, which is to either buy or sell a crypto asset. The upside to this process is that it doesn’t waste any time to trigger a trade when the parameters given to it are matched according to the real-time action in the crypto market.
Crypto trading bots are usually found in the form of software built by a third-party developer. You can either subscribe to use its service or download the software onto your device. After you have access to a trading bot service, you need to integrate it with your preferred exchange, provided they provide support and access to the bot trading software you are using. The integration is done by using an API (Application Programming Interface) that acts as a bridge between your trading bot and the exchange you are using for crypto trading.
There are different analysis tools the trading bots rely on for making a preferred trade decision. Among these tools are price indicators, which every crypto trader must learn to use whether they know them beforehand or not. These price indicators are crucial to analyzing the direction where the market is heading, and they certainly help you remain one step ahead of those who are just playing a guessing game.
The indicators used in making decisions include Moving Averages (MA), Fibonacci retracement, Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Bollinger Bands, Volume, etc. These are mathematically based patterns plotted on charts that help traders identify signals and trends in the market. The bots then automatically extrapolate these signals.
Remember, it’s important to define your parameters and signals for your cryptocurrency trading bots wisely because they influence how the bots keep an eye on the market and decide when to make trades. The bot will only buy or sell when the market conditions match the rules you’ve set in advance.
Types of Crypto Trading Bots
Different trading bots software have different sets of strategies they employ when making decisions on opening and closing a crypto trade. These features make additional bot trading software unique from one another. We will look at the different types of strategies they employ and how exactly they differ from each other.
Coin Lending Bot:
Coin Lending bot works on the same principles as you would expect in a traditional lending process where one party loans out their funds to earn a return on their investment. In Coin Lending, a certain entity lends coins to traders with the agreement that the trader will return the loaned coins along with an additional percentage. Coin Lending Bot automates this lending process. Users can set the terms of the loans, including durations and interest rates. Coin Lending is one form of passive income source for crypto traders as they earn interest on their holdings without actively participating in a trade.
Arbitrage Bots:
Arbitrage is the practice of capitalizing on price differences for the same asset in different markets to make a profit. In the space of cryptocurrency, Arbitrage Bot works on this same principle. It looks for opportunities where the same cryptocurrency is being traded at different prices at the same time but on separate exchanges. The Arbitrage Bot then decides to purchase or sell that cryptocurrency accordingly.
For example, an Ethereum token is being traded on Binance at $1700, but at the same time, the same Ethereum token is being traded at $1720 on Bybit. The Arbitrage Bot would purchase Ethereum from Binance and then sell it on Bybit, making a net profit of $50 on that single trade. It is essential to note that these differences between the same tokens on different exchanges can be minor, and the differences are also short-lived before both exchanges show the same value for one particular token. Therefore, an Arbitrage Bot must be very quick in its decision to either sell or purchase an asset that shows discrepancies in value on two separate crypto exchanges.
Experienced traders mostly favor arbitrage bots, and are typically used by institutional investors and high-frequency trading firms.
Margin trading or Leverage Bots:
Margin or Leverage trading is when a trader borrows additional funds, usually referred to as leverage, to increase their position size. The objective behind this is to increase their profit margins by using extra leverage. The leverage is typically provided by the exchange you are trading on. Leverage bots, therefore, allow users to enter larger trades than their available capital. Traders would have to specify their desired leverage ratio beforehand.
For example, if a trader has set a Leverage ratio of 5x, then this means that the trader is opening a position five times greater than his investing amount. Leverage Bots can prove very beneficial to you in a volatile market where a quick price change in the direction you anticipate can help you gain exponential returns on your initial investing amount. However, there is a massive risk associated with leverage trading as well; that is, if the price of the crypto asset moves in the direction opposite to the one you anticipated, then the losses gained would also be huge. Many traders get liquidated due to being over-leveraged.
These bots automate the process of borrowing, executing orders, and managing risk, making margin trading accessible to a wider range of traders. Nevertheless, it’s crucial to approach leverage trading with caution, as it requires a deep understanding of market dynamics and risk management to avoid substantial losses.
Market Maker Bots:
Market Making refers to a firm or an individual participating in a trade that involves buying and selling an asset, providing bids and offers along with the market size. Market makers aim to profit from the bid-ask spread—the difference between the highest buying price (bid) and lowest selling price (ask). By carrying out trading at both ends, they reduce price volatility and create a more stable trading environment. Market Maker Bots typically operate with low trading fees and can earn profits from the spread and, in some cases, rebates from the exchange. Their role is vital in ensuring a smooth and orderly market, attracting traders and investors.
Advantages of Using Crypto Trading Bots
- Crypto trading bots can operate 24/7, unlike humans, so you have a low probability of missing out on a profitable trade, which you could have otherwise missed due to being occupied with your other commitments.
- Crypto trading bots can give you better accuracy and timing if your parameters are set for a favorable situation. The cryptocurrency market is highly volatile, and making the right call at the right time can be very beneficial for a trader.
- Crypto trading bots also eliminate the human factor, meaning a trader can change his decision at run time due to feeling less confident about their initial analysis.
- Sometimes, this move might prove beneficial, but you must be sure about your analysis before entering any trade. Crypto trading bots keep the emotions out of trading, and if you have coded your trading bot well, then it will save you from making mistakes due to impulsive decisions.
- Most important of all, crypto trading bots save you from the laborious task of keeping your eyes round the clock on your mobile or computer screens. You can utilize this time to carry out other important tasks.
Disadvantages of Using Crypto Trading Bots
While trading bots do have their benefits, there are some negative aspects attached to them as well, which we simply cannot ignore.
- Most bot trading software has a simple interface from where users can select options to acquire its services and set their parameters to open or close a trade. But if you want to go towards more customized or advanced trading strategies, then you need to have some coding/programming skills. Having such skills can give you more advantages, but learning programming isn’t everyone’s cup of tea, so they resort to the options they can easily utilize.
- For the trading bot to perform efficiently, it needs to run 24/7. If, for some reason, you have turned off your computer or facing any number of issues due to which your computer gets shut down, then your trading bot will also stop operating. This means that you would have to maintain a stable supply of power to your computer and constantly keep an eye on the software running smoothly.
- You also need to familiarize yourself with different trading strategies before you start using crypto trading bots. The reason behind acquiring this knowledge is that it will help you in setting up your trading bot to carry out your trading activities. Cryptocurrencies’ volatile nature will require you to change strategies depending on what works at the time. Moreover, a trading bot is only as good as its programming.
- Automated crypto trading bots often require access to your cryptocurrency exchange accounts to execute trades on your behalf. Entrusting your assets to a trading bot does come with inherent risks. There have been instances of malicious actors creating fraudulent trading bots that contain hidden codes designed to steal funds or compromise your security. To eliminate these risks, it’s crucial to exercise caution and conduct thorough research when selecting a trading bot.
There are different trading bots available that you can use according to your preferences. Your decision will be influenced by factors like which exchanges allow the integration of these trading bots with their framework. What type of features do these trading bots software provide, like Dollar Cost Averaging, Portfolio Stop Loss, Threshold Rebalancing, Smart Rebalancing, Spread/Slippage controls, etc.? How much fee do they charge for using their trading bot services? Do they have mobile applications for Android or iOS devices? It all comes down to your wish list. Therefore, you need to do thorough research before using them.
