Crypto Trading Bots: The Rise of Machines in Crypto Trading
The crypto trading world holds a lot of similarities with the traditional Forex and securities one. Traders use a combination of technical and fundamental indicators to determine when to buy or sell. The orders have the same working principles, such as stop loss, limit buy, etc.
Initially, it was not so. The early days of crypto trading were people doing P2P trading, buying and selling at whatever the market price was, or waiting patiently for their preferred rate. This has changed over the years as fully dedicated crypto exchanges have popped up, using the same advanced trading environments as traditional ones, using order books (in centralized exchanges) and liquidity pools (in decentralized ones) to manage the different buy/sell order types.
Taking in another aspect of traditional trading, crypto enthusiasts are now increasingly using automated programs to assist their trading. Called Trading Bots (for obvious reasons), they are taking over the world.
The Time of Cryptocurrency Trading Bots is Here
Trading bots of today are complex, proper apps that can contain thousands of programming codes. Like any other bot, they have had their evolutionary phase.
In the past, these were custom build scripts allowing traders to access their trading platforms remotely and execute simple commands in succession. The idea behind this is that the trader would save time and effort by logging in manually every time they wanted to make a trade. The trading bots were able to execute commands without any human intervention.
Today, they are a good service, with many firms’ business models revolving around these. The ready-made bots have become more complex, using machine learning and artificial intelligence to boost the profit-making capabilities of traders, at times far beyond what is humanly possible. Almost all mainstream crypto exchanges offer trading bot connectivity, allowing remote access to any trader’s account through APIs.
Major crypto exchanges have even gone one step further by offering trading bots built into their services.
Many centralized exchanges now offer bots in-built, so traders don’t need to rely on third-party services. The final selection depends on the exact bot capabilities the trader is looking for.
How do Trading Bots Work?
Generally speaking, bots are simply programs that automate repetitive tasks and/or are slower to execute if done by a human. Crypto trading bots are based on the same principle but with a few more ingredients.
Time is of the extreme essence in the non-stop world of crypto trading. Yet, a simple understanding of when to place an order without knowing how much or using different buy and sell orders in tandem that automatically adjust to the market scenario can easily lead to disastrous trading.
Bots of today are more than just mindless drones. Modern trading bots heavily use machine learning algorithms and artificial intelligence in conjunction with parameters defined by the operators (AKA crypto traders). Simply put, traders can go as far as to rely on the trading bots to make buying and selling decisions on their own, with the traders simply entering data such as risk level, profitability sought and how much to invest overall.
The trading bots intake various data (such as trends, estimated future price movement, historical activities, etc.), use the extensive training the programmers have fed, and make decisions that best fit predictions.
It sounds a bit simple, but there’s more going on at the back. A typical crypto trading bot works in four stages to make even a single trade:
Analysis
Trading bots intake a lot of past data – much more than a human can incorporate. With machine learning at its back, it can analyze tons of data that can stretch back days, even months and years in a fraction of the time we would require.
The Signal
With the data analysis complete, the trading bot creates a trading signal. This basically makes a prediction based on the data analysis and identifies possible profitable activities.
Risk Allocation
Taking the trading signal and matching it against the predefined parameters set by the trader, the bot comes up with the best possible scenarios for allocating funds. This is done so that the mathematical models do not exceed the risk profile of the trader.
Order Placement
Once everything is matched, the trading bot accesses the trader’s account through a connected API and places the order(s). The trading bot continually monitors the order until the crypto exchange executes it.
Depending on the complexity of the trading bot, it can cancel and replace orders before they are executed by the exchange, adjusting and fine-tuning as the market changes.
Two Sides of the Coin: Pros and Cons of Trading Bots
While it is clear that trading bots can do a lot of stuff faster than a human being, the question of “are trading bots worth it?” remains. Let’s see a few characteristics of the bots to determine if it is worth using them.
Pros
Speed
It has already been established that since the computing process can be much higher than a human being, it makes sense to use trading bots to gain the competitive edge of speed and time.
AI, But Emotionless
While artificial intelligence is thrown around a lot when it comes to trading bots, the fact is that all decisions are made by crunching numbers. The lack of human emotions leads to a systematic approach that can yield better results as “intuition” and “FOMO” are practically eliminated in decision-making.
Non-Stop Trading
With the crypto market open 24 hours a day, a trader needs rest; the bot doesn’t. Like a machine from a sci-fi movie, the bot will persist. No need for sleep, taking a break to eat, or anything.
Better Analysis
Another aspect already discussed is that trading robots can take in a massive amount of data to crunch and use various analytical tools. This allows them to make more accurate predictions.
Best for Novices
Discuss with any trader, and they will tell tales of horror as they experienced significant upheavals in their early trading days. Time, effort and a lot of underwater capital make a trader more experienced. With trading bots, even a novice can jump-start their trading career.
Cons
Does Not Compute
Where trading bots are better at technical analysis, they lack fundamental ones. Sudden market sentiment swinging cannot be accounted for in numbers (at least not directly and in sufficient time). This means that trading bots only react to market changes, losing the edge.
One Size Does Not Fit All
Crypto trading bots, which can help reduce risks, are also limited in their very nature. A particular bot might yield results for a riskier trader because it has been programmed. For a more cautious trader, it might not be the best choice. Finding the exact bot that suits a trader’s needs can be challenging and time-consuming.
Scam Galore
With the increasing demand and attention trading, bots are receiving, it has also opened doors for bad actors, who would like nothing more than to deceive people into buying their service and skimping away with the money. Finding a legitimate bot can be an exercise and a risk many might not be willing to take.
Trending: Trading Bots as a Service
A survey involving more than 10,000 traders revealed that while a small percentage of respondents (38%) relied on trading bots, the percentage was much higher, hitting more than 86%.
What this means is that trading bots are still something of a novelty. The sheer size of the capital involved shows that traders making significant capital investments in the crypto sector prefer using automated trading tools.
With significant capital comes a booming business. Today, several projects and firms online have their whole business around offering trading bots to people who are serious about leveraging technology and its speed to their advantage.
True, legitimate trading bots can be an expensive investment, with the top bots costing too much for small-time investors. That could explain the small number of traders but the large capital involved. However, this is changing at a rapid pace, with many crypto exchanges offering their own bot service at little to no extra charge, enabling mass adoption.
Should I Join the Bot Uprising?
Short answer: Yes!
Trading bots are a norm in the traditional financial world. One research says that the “algorithmic trading” market size will rise to as much as $18.8 billion by 2024. Bear in mind this is only for traditional markets. With more profit chances (although carrying higher risks) and dropping economic and financial barriers in the crypto arena, trading bots are the way to go.
It might take some time for you to decide which trading bot is the best fit for you. The best suggestion would be to use only ones from legitimate developers and see if a demo feature is available. You can test out the bot in real-world conditions without using your crypto. If it suits you, go for it.