Understanding Crypto Trading Bots — Do They Really Work?
If you have been trading cryptocurrency before, you will find you now no longer have to sit in front of your computer all day. The cryptocurrency market never closes, making it almost impossible for traders to consistently monitor market fluctuations, allocate risk, reduce error, and trade around the clock. In all likelihood, you must have been exposed to the necessity of using automated crypto trading systems to help make your forays into the markets to boost profits.
Implementing AI and codes, crypto trading bots are developed to run specific tasks with little to no human intervention. In the cryptocurrency space, crypto trading bots act as automated trading systems that initiate trades on behalf of the trader — usually trading one or multiple cryptocurrencies on an exchange platform. The question now is, do these bots really work?
What are Crypto Trading Bots?
Crypto trading bots are automated systems that help traders buy and sell cryptocurrencies at a defined period. In other words, crypto trading bots are codes developed to execute trades. Instead of keeping tabs on market analysis and then deciding on which time to buy or sell, crypto trading bots do all this work and perform the analysis. Typically, a crypto bot can analyze and interpret the market to evaluate potential market risks.
You can think of these bots as outsourcing a task to a trader capable of trading the markets for you 24/7 while you proceed to do your other work. You can instruct a bot to carry out certain tasks for you. A common example is setting up a crypto trading bot to buy Bitcoin when the price drops to a certain point.
Crypto trading bots often save time and are more cost-effective than hiring human experts. And its main objective is to minimize loss and increase profits. A plethora of automated software allows traders to trade different crypto assets, including Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and much more.
How do Crypto Trading Bots Work?
Essentially, Crypto trading bots are designed to predict the flow of the market. How do they do it? The bot studies the previous flow and the current records, and analyzes this data to predict the most probable, profitable choice. But of course, they can’t guarantee you all wins. They are loaded with artificial intelligence and do what they are programmed to do, rendering them incapable of thinking outside the box.
To better understand how they work, let’s analyze the following components:
- Market Risk Prediction
Based on the details obtained from analyzing the market, trading bots can allocate risks. Traders can input specific codes and parameters, usually involving trading capital and stop limit.
- Trade Executions
Crypto trading bots use APIs to automatically buy or sell cryptocurrency assets. These bots are able to execute multiple buy and sell orders within a short time. This is an advantage in case you want to avoid buying for the long term.
Types of Bots
There are different types of crypto trading bots. In fact, some bots are developed for specific crypto trading strategies. A widely-known example is the arbitrage bot — used in crypto arbitrage trading. Arbitrage bots essentially analyze asset prices across multiple exchanges and execute trades in order to benefit from the market differentials. For example, Bitcoin can be trading at $23,300 on LBank, while trading at $23,295 on another exchange. You can set your trading bot across the two exchanges — instruct it to buy on another exchange and sell on LBank.
There are other types of bots executing buy/sell orders based on indicators such as price and volumes. Additionally, some bots implement past information to execute trades.
What are the Advantages and Disadvantages of Crypto Trading Bots?
The first benefit of crypto trading bots is that emotions are taken away from trading. Trading volatile cryptocurrencies come with a lot of emotional investment, and with emotions come mistakes, no wonder many crypto traders lose money to several common emotions such as greed and fear. The trading bot essentially eliminates emotions from trading and prevents traders from making biased trading decisions.
Another advantage of trading bots is speed. Time waits for no man. These automated bots can instantly carry out thousands of trades across various time zones and markets. Since it is automated, trades are executed in a matter of seconds — way faster than trading manually.
However, with all of these pros, you should understand that crypto trading bots aren’t immune to losses. There are many downsides, including poor designs, providing only a marginal return, and being highly technical.
Should You Use Crypto Bots?
Yes, most of us are aware that we need to set stop losses and profit levels. But these levels have to be based on current market conditions. Is the market trending, or is it ranging? Should you adjust your strategy for key governmental and institutional announcements, or ignore them? Are there particular times when you should pull out of the market altogether? Or at least when you should adopt tighter stop loss and profit level settings?
Ignore these questions at your peril. While some leading trading bots platforms argue that the designers have already factored the answers into their software and that the robots are entirely prepared for perfect trading, it’s usually not the case. So, the most fundamental rule echoes the fine old English legal proverb ‘let the buyer beware’. Always do your own research and never risk more than you can afford to lose.
For many day traders or scalpers, automated trading bots can be a useful tool in trading the markets. However, it is important to treat crypto bots like any other tool with caution and knowledge. And with the frank admission that they can only ever be as perfect as the trader using them.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.