As cryptocurrency trading becomes more and more popular, the number of traders using crypto trading bots is increasing as well. It is very similar to the traditional trading, where, for example, vast majority of trades on the New York Stock Exchange (NYSE) is done by the algorithms. Let’s take a closer look at automated trading, so you won’t miss the trend.
What is crypto trading bot?
Crypto trading bot is a software program, which automatically executes trades according to a predetermined strategy. Basically, the trading bot places buy and sell orders on your behalf on the crypto exchange. You just need to connect your cryptocurrency exchange via API and set up a strategy. Depending on the level of bot’s advancement it can use various signals and indicators to enter or exit the crypto market at the favorable time, such as (but not limited to): bollinger, RSI, MACD, stop loss, trailing stop loss, take profit, etc.
Why use a cryptocurrency trading bot?
There are several reasons why bots are used in trading. Let’s figure them out.
1. No emotions.
One of the rules that every professional trader follows – keeping emotions under control. Setting the bot to follow parameters of the trade you want and letting the bot run – definitely helps with that. Bots do not have emotions, they just follow your strategy.
2. Saves time.
Crypto trading bots will save a great amount of your time. You don’t have to monitor the market nonstop, bots can do it for you. Also, you don’t need to manually calculate order prices, your bots will deal with these tasks.
3. Increased trading speed.
Trading bots are much quicker than humans, therefore they can immediately react to the crypto market fluctuations. It is difficult to manually place a big amount of orders in a very limited time interval, but cryptocurrency bot can do it easily.
4. 24/7 trading.
Unlike traditional stock market, crypto market never closes and trading bots will continue to trade even when you sleep.
Risks of using cryptocurrency bots
There are also a few points that should be taken into account before you start using a crypto bot.
1. Don’t forget about your bots.
You can’t just turn on your crypto trading bots and forget about them for a month. They need to be managed and updated regularly, so they fit the current situation on the crypto market. Otherwise, you will likely have losses instead of profits.
2. Know how to trade.
Bot is an automation tool not the strategy or decision-maker. You determine what to trade and with what strategy. In order to set up a strategy correctly, you don’t necessarily have to be a pro trader, but you do need to check up on the market for the pairs you trade, analyze charts, and learn basics of cryptocurrency trading principles.
3. Beware of scams.
Scams are not an unusual thing in the trading space, so do a research on the bot before using it. Look at how long it has been on the market, read some reviews and users’ feedback to make a proper impression.
4. Check the quality of your bot.
Not every crypto trading bot is coded well enough and the quality of software is very important. If the quality is poor, you will likely lose money instead of earning them. So again, it is a good idea to learn more about the bot you are willing to use. Also, it is better to start with small sums just to see how the crypto bot performs.
Types of crypto bots
To start with, crypto trading bot can either be downloadable (when you need to download a program on your computer) or cloud-based (when you can use cloud server); free or paid. But the main difference is what is the bot’s primary function and there are few main options:
Trend Trading bot
Trend trading is a strategy which means analyzing trends of the crypto asset and execute buy and sell orders according to these trends. For example, if coin’s price is going up, the bot will enter a long position. And vice versa, it will enter into a short position if the price is dropping. As a result the bot will make profit from the price changes.
Arbitrage crypto bot tracks if there is a difference between coin’s price on two markets, buys the coin where the price is lower and sells where it is higher. Arbitrage trading was very popular in the early days of cryptocurrency, because prices could vary greatly between two exchanges. Nowadays, the spread between exchanges is much lower and it is harder to utilize arbitrage bots, but they are still viable.
Coin lending bot
Some of the cryptocurrency exchanges (Poloniex and Bitfinex, for example) support lending cryptocurrency. The point is that a trader borrows your crypto in order to trade and make profit with it. You just need to set an interest rate, amount of crypto and duration. But crypto’s volatility is a big problem, because of it you should constantly check interest rates and place new orders. And lending bot will help you here, removing most of the manual routine.
Market Making bot
Basically, market making implies catching the spread between the buy and sell price. Trading bot places buy and sell limit orders near the current price. When both orders are completed you will gain profit. As the market fluctuates, the trading bot will continue to place limit orders to take advantage of the spread. Market making is very popular now and the competition in this area is rather intense. Obviously, it affects potential profitability of this method.
The signal bot uses external signals to place buy and sell orders. There are plenty of services called signallers, which sell signals for a fee. Those signals are usually based on the technical analysis, market rumours, news, etc. and essentially tell which coin and when to buy/sell.
In conclusion, we hope that this article will give you an idea about what cryptocurrency trading bot is and also will help you make a decision, whether to use it or not. If the answer is yes, be sure to check out our TradeSanta trading platform!