23 February, 2024



What Are Cryptocurrency Trading Bots And How Do They Work?

2 years ago

12 Dec, 2023

The crypto market, unlike the traditional stock markets, never stops. This makes it next to impossible for private traders to track market fluctuations, diversify risk, reduce error and esure trading discipline 24 hours a day, 7 days a week, 365 days a year.

In the unpredictable world of crypto trading, it is of the utmost importance to create a carefully calibrated, safe and reliable trading strategy.

This article will take a look at crypto trading bots, which should help you trade your crypto portfolio or actively trade crypto if you are keen to start.

What is a Crypto Trading Bot?

In a nutshell, a bot is an automated program that operates online and performs repetitive tasks, such as trading a strategy, more efficiently than humans. As a matter of fact, around 50% of the traffic on the internet is bots that interact with web pages and users, scan for content, and perform other tasks.

A crypto trading bot basically operates under the same principle. They are software programs that execute functions using artificial intelligence (AI) that is based on pre-established parameters. Trading with a bot has a fair number of advantages, with one of them being that you will no longer miss trade opportunities.

Whether you want to buy into the most undervalued cryptos, or simply want to add new crypto coins to your portfolio, a bot allows you to automatically buy, sell and hold assets in a timely, efficient and automated manner day or night from anywhere in the world.

How Do Crypto Trading Bots Work?

In order to trade with a crypto bot on an exchange platform, you must authorize the trading bot to access your account via API keys. This access can be granted or withdrawn at any time.

By communicating directly with crypto exchanges and placing orders automatically based on your preset conditions, trading bots can offer exceptional speed and efficiency, fewer errors and emotionless trading that is tailored to your individual risk tolerance and investment goals.

The generic stages for trading bots are data analysis, signal generation, risk allocation, and execution.

Data Analysis

Data analysis is crucial to the success of a crypto trading bot. Unlike humans, machine-learning bots can identify, gather, and analyze large amounts of data faster, smarter and better.

Signal Generation

Once the data analysis phase has been completed, the next step will be the signal generation. Here, a bot does the job of the trader, making predictions and identifying possible trades based on market data and technical analysis indicators.

Risk Allocation

This is where the bot distributes risk according to a specific set of parameters and rules set by the trader. This typically includes how and to what extent capital is allocated when trading.

Execution

In this last stage, crypto is bought and sold based on the signals generated by the pre-configured trading system. In the execution phase, the signals will generate buy or sell orders, which are then sent to the exchange platform via their API.

Do Crypto Trading Bots Work?

Yes! The financial industry has been raking in record profits for decades through the use of automated trading strategies. Within the past decade, algorithmic trading bots have overtaken the entire financial industry, with algorithms now responsible for most of the trading activity that takes place on Wall Street.

The better question to ask is how well crypto trading bots work. Their effectiveness largely depends on a number of factors, such as the platforms and bots that you choose to use as well as your levels of expertise and experience.

Advantages of Crypto Trading Bots

Emotionless Trading

Trading a market as volatile as the crypto market can be an emotional process, and emotions are dangerous in trading as they can lead to lapses in judgment. As much as 39% of manual trades are influenced by our emotional states, which may cause us to make irrational decisions.

Instead, choose to become a smart trader who makes money through the utilization of trading bots – ensuring that your trading is devoid of all emotions and systematic.

High Trading Speed

When it comes to speed in trading, bots are by far faster than humans. Millions of computations and thousands of transactions across various time zones and markets can be executed almost instantaneously by trading bots.

In the time that it takes you to read this sentence, a trading bot could have made multiple profitable trades for you.

Backtesting and Paper Trading

With trading bots, backtesting and paper trading allows you to harness the power of historical data to simulate the viability of a particular trading strategy or pricing model.The point is not necessarily to predict the future , but rather to determine how well a particular trading strategy is likely to perform on historical data.

With a reliable backtesting tool in hand, as well as an accurate set of data, you can explore new strategies, add expertise and build confidence before you are ready to put your money on the line.

Risk Diversification

By automating your trading process, bots can ensure consistent trading discipline even in volatile markets when fear can lead you to sell or luck can cause you to buy. Using pre-established trading rules, bots can optimize long-term performance without the short-term costs of emotional human interventions.

Disadvantages of Crypto Trading Bots

Crypto trading bots are not necessarily an instant path to success. They may be automated, but are not automatic. To build a profitable crypto trading bot, traders must understand that the process of creating a good trading bot takes clear goals, patience, and knowledge as well as a certain degree of trust.

If you are interested in renting a crypto bot rather than creating one, you will also need to remember that most crypto trading bots offered by some of the most popular platforms only produce marginal returns. With the intent of growing the number of clients, platforms tend to advertise bots for rent without thoroughly testing the bots in different market conditions.

Crypto Trading Bots and Timing

Two of the most critical elements of how crypto trading bots work are trade entries and exits. A trade position is a proxy to confidence in the predictions being made about any given crypto asset, and these predictions have two possible outcomes. Any given prediction will either be correct (take profit) or incorrect (stop loss).

This is why it is important how and when this decision is made. It is also important to pair the correct strategy with the right market regime, as specific strategies target specific market conditions. For example, certain automated strategies will work in a bull market, but may not work in a sideways or bear market, and vice versa.

Choosing the Right Trading Strategy

With so many people now trading crypto, and the number of people growing daily, there are now more ways to make, or lose, your hard-earned cash. Therefore, it is important to understand the different types of crypto trading bots, as well as which ones to avoid as a beginner crypto trader.

Whether it be arbitrage bots, coin lending bots, margin trading or leverage bots, and market maker bots, traders have a full range of approaches at their disposal. Here are some to keep in mind as you start your crypto trading journey.

Swing Trading

Swing trading involves trying to profit from price fluctuations that occur over the medium to long term. This can be a few days or even weeks. Given the highly volatile nature of the crypto market, the use of swing trading bots has proven to be an attractive strategy for many traders. However, this type of trading may be a bit difficult to master.

This type of trading generally makes use of technical analysis, which is studying statistical trends involving price and volume, and fundamental analysis, which is determining whether an asset is over- or under-valued. To enter and exit trades, swing trading also includes a sound understanding of the risk/reward ratio for each trade.

The technical analysis aspect of swing trading includes the use of technical indicators, which can either be leading or lagging. Examples of momentum indicators include the Relative Strength Index (RSI), Stochastic Oscillator, and On-balance volume (OBV).

Trend indicators that are often used in swing trading include Moving Average Convergence Divergence (MACD), and Bollinger Bands (BB).

Day Trading

Unlike swing trading, day trading is the practice of buying and selling assets on the same day. The key work here is volatility, which is often a double-edged sword. So, play your cards right and you could stand to make a bundle of cash via day trading, but you can also easily lose all of your cash in a heartbeat.

Day trading bots can simplify your trading life as it relieves some of the need and stress of sitting in front of a computer throughout the day. Plus, since the trading bot is emotionless, it can also mitigate some of your psychological handicaps, such as FOMO – the fear of missing out.

Since day traders aim to profit from volatility, the focus is on volume and liquidity, which is why technical analysis prevails. Day traders will also make use of technical indicators and chart patterns.

Scalping

While day trading is one specific style of trading, there are a number of subtypes, such as scalping. This is a popular short-term trading strategy that traders use to attempt to profit from small price movements. If done right, this trading style can yield relatively decent returns.

Unlike swing traders, scalpers look to exploit short-term volatility as opposed to larger price fluctuations, which normally requires a thorough understanding of market mechanics, as well as quick thinking and even quicker decision-making skills.

Scalp traders generally look at lower time frames, with intraday charts that can range from 1 minute to 1 hour. However, scalpers tend not to stay in a position for longer than an hour, sometimes a couple of hours if the trade is going their way.

Buy and Hold

Although not necessarily considered a trading strategy, “buy and hold” still deserves a mention as it can be a passive approach used by many traders. Basically, this approach entails buying large amounts of a crypto or a few cryptos and holding it for a sustained period of time.

This approach does not let you enjoy the benefits of algorithmic trading, as you are not actively trading the crypto markets. As a result, technical indicators, entry price points and time become largely irrelevant – you are merely sitting on an asset in the hope that it appreciates over an extended period of time.

5 Trading Bots To Look At

Coinrule

Coinrule has the broadest range of preset trading strategies – making it one of the most popular bots currently available in the market. Users are able to customize their investing and trading with more than 150 trading templates automatically executed when market conditions meet predefined parameters.

Furthermore, the platform regularly introduces new templates to its users, which include long-term holding strategies, stop-loss settings, and accumulation.

Coinrule offers free and paid plans, and the number of templates that you will have access to will vary according to the plan that you opt into. The paid package comes with advanced charting options, unlimited template usage, and even includes one-on-one trading tutorials. On the other hand, the free plan has 7 complimentary template strategies.

The list of exchanges that the platform includes is: Coinbase Pro, Binance, Bitstamp, Bittrex, Poloniex, Kraken, BitMEX, Bitfinex, Bitpanda pro, Liquid, Okex, Binance US, HitBTC.

WunderTrading

WunderTrading is a crypto automation platform with mirror trading and crypto portfolio management tools. Users may create completely autonomous crypto trading bots with TradingView’s PineScript. Platform users can also earn passive crypto income by following highly skilled traders or trade manually with the advanced Trading Terminal.

The diverse range of trading capabilities that WUnderTrading provides is what sets it apart from its competitors in the market. Users can utilize the trailing-stop and even swing-trade functionality on the platform.

There are also advanced trading features such as stop-loss and take-profit that can help boost any trading strategy. The WunderTrading platform also enables users to incorporate numerous trading algorithms and technical indicators into their bots due to the TradingView integration.

Napbots

This crypto trading bot platform gives access to automated crypto trading strategies that are designed by its team of elite quants. Napbots is one of the first platforms of its kind to offer access to crypto trading strategies designed by a team of professionals. Users can also access all details regarding strategies, how they work, and their performances thanks to the platform.

The automated trading strategies and indexes available on the Napbots platform are products of years of practice as well as AI and machine learning to provide users the hedge that they need. Some of the strategies included on the platform include Long Only, Long Short, Hourly, Daily, or Weekly trades, and much more.

To get started, users simply need to connect their exchange through API keys and choose the strategies that they want to use. The strategies will then do the work. Napbots is available on Binance, Kraken, FTX, and Bitfinex.

Bitsgap

Bitsgap is one of the best bitcoin (BTC) trading bots in the market that can help any user manage their crypto assets with ease, as well as create a powerful and effective strategy with just a few clicks.

The platform can inspect up to 10,000 crypto pairs and pick out coins with the best potential. With Bitsgap, users can view their trading through a chart on the platform, test settings before actively trading, and access the trading bots by downloading them.

The support exchanges are: Kucoin, Livecoin, CEX.IO, Poloniex, Bittrex, Coinbene, Coinex, Huobi, Gate.io, Bitstamp, Liquid, Gemini, Bit-Z, Yobit, DDEX, HitBTC, Bithump, Bitfinex, Bibox, Exmo, OKEX, BigOne, Binance, Kraken.

Gunbot

This is one of the most advanced trading bots in the market. Launched in 2016, Gunbot includes a large array of trading features and is a reliable piece of software that is currently automating the crypto trading needs of more than 25,000 active users.

Getting started with Gunbot is relatively straightforward. Once set up, users have access to a suite of customizable strategies for every type of trader. On their marketplace, you are even able to find free, profitable plug and play strategies that are ready to go. Gunbot hosts frequent tournaments, so their users can even earn a little extra on the side.

Gunbot offers support for: Binance US, Bitmex, Bitfinex, Bitmex Testnet, Coinbase Pro, HitBTC, Huobi Global, OKEx, OKCoin, Bitstamp, KuCoin, Poloniex, Cex, Bithumb, Kraken, Bittrex, Coinex, Binance and +100 more.

To Recap

Crypto trading botsare software programs that execute functions using artificial intelligence (AI) that is based on pre-established parameters.

By communicating directly with crypto exchanges and placing orders automatically based on your preset conditions, trading bots can offer exceptional speed and efficiency, fewer errors and emotionless trading that is tailored to your individual risk tolerance and investment goals.

Crypto trading bots are not necessarily an instant path to success, however. To build a profitable crypto trading bot, you need to keep in mind that the process of creating a good trading bot takes clear goals, patience, and knowledge as well as a certain degree of trust.

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