Often referred to as the financial market that never closes and never sleeps, cryptocurrency can be a highly stressful trading space for traders and casual investors in the industry. And for investors who are conversant with cryptocurrency, you must have come across the increasingly popular trading bots. While you are asleep, the bot is up and working.
Just like machines have been used to aid translation, bots that have been programmed approximately can allow trades to be executed faster and more efficiently in comparison to a manual trade. The growing popularity of cryptocurrency translates to an increase in the number of crypto trading bots available. These bots are either free from open-source platforms or licensed to users in exchange for a fee.
However, ascertaining which bots work better can be a bit of a challenge. This article explains what trading bots are and how they work for crypto trading. It will also list some of the best trading bots in the market for 2020 and factors to consider when choosing one.
What are Trading Bots?
In a nutshell, trading bot software is a program that interacts side by side with financial exchanges to place a buy or sell order on behalf of a trader to generate profit. The buy or sell order is set depending on the market data interpretation.
The bots automatically decide to place an order by monitoring market price trends and reacting according to a set of programmed rules. Usually, a trading bot analyzes market actions, such as price, time, volume, orders, etc. These actions can, however, be programmed to your convenience and preferences.
As a result of the more passive trading of cryptocurrency, most traders do not have the time to analyze the market. The idea behind the bots is to carry on efficient trading when you have limited time to keep up with the market.
How do crypto trading bots work?
The first part of accessing your bot is to exchange data. A trader can provide the trading bot with access to their account by providing bot with their API public key and API private key. The public and private keys are designed to authenticate authorization from the trader to the bot.
Generally, efficient trading bot works in three sequential parts:
- Signal Generator
At this point, predictions are made based on the data that goes into the signal generator. The signal to buy or sell comes. In a scenario where you see any bot that states “technical indicators,” your predictions should push you to walk away.
- Risk Allocation
The second part is deciding how much to allocate to a buy or sell signal. Should you assign all of your capitals or just a part to the trade? Should you buy all in a single transaction, or should you average in?
Once you are sure of what portion of your capital to allocate, then you execute. For example, if you have a lot to buy (let’s say $100,000,000 from 500 clients), then you shouldn’t do this all in one trade. Buying in a single trade will likely amount to you getting an unfavourable price.
These three parts (signal, risk, and execution) all need an application of unique algorithms and optimisation processes. Thus it would help if you had an excellent trading bot that holds you in good stead for profitability.
The Purpose of Trading Bots
The primary purpose of bots is for automating actions considered too complex, time-consuming, or difficult for humans to carry out manually. Bots are equipped to carry out sophisticated tasks such as intelligently routing trades between any asset for a diverse portfolio, automating one trading strategy against a single trading pair, and more.
Additionally, some bots are built to enable traders to implement a full portfolio management strategy. This portfolio helps to save an immense amount of time. The need for you to continually be online to place trades manually is eliminated. Bots automate the execution of your strategy day or night. Equally, bots collect data more accurately and with high speed. The trade orders are placed more precisely, and numbers are crunched way faster than a human can.
Factors to Look for When Choosing the Best Crypto Trading Bots
Your bot must be very reliable. Because you wouldn’t want to lose a great buy or sale because your bot stopped working or went offline. One way to find out how reliable a bot is, is to look up the reviews of other users of the bot you might be interested in.
You need to give the trading bot access to your funds. This can be very risky, because in the event you are hacked a weak trading bot spells catastrophe. So just as with your reliability search, look out for reviews, so you get to pick a bot with top-notch security.
The essence of having a trading bot is to make profit. There is no point sticking with a bot that isn’t profitable. The trading bot you invest in should be able to bring in significant profit over its trading expertise.
One thing that stands cryptocurrency out is that the whole network is fully transparent. All foul play is being curtailed. The same level of transparency should apply to the trading bot that you decide to work with. Besides building trust, transparency also helps you reach the right people when there’s a need to fix any issue.
- Crypto Trader
Types of Trading Bot Strategies
Although the cryptocurrency market isn’t as sophisticated as other financial markets, it has successfully been able to integrate algorithmic trading. And with the aid of technology cryptocurrency has been able to catch up on with its rivals in terms of providing trading bot services, and allowing investors to obtain strategies such as;
When cryptocurrency trading first came in, arbitrage was one of the core strategies for profiting making. This means buying assets from market A and selling them in Market B at a higher price. Therefore earning a profit on the differentials between price offer on various exchanges.
Currently, these exchanges are much smaller, but they still appear in marketing from time to time. What trading bots dose is to assist investors in getting the most out of these differentials. Additionally, arbitrage can be utilized by traders who want to include future contracts in their trading strategies. So they can benefit from the difference that exists between a futures contract and an underlying asset. Arbitrage helps them consider futures contracts that can be traded on different exchanges.
- Market Making
Another trading bots strategy investors can use is the market making strategy. The strategy enables a trader to have steady “buy and sell prices” on different digital currencies and derivatives contracts. This allows the trader to collate the spread between the “buy and sell price.”
To implement the market making strategies, the buy and sell limit orders should be made near the existing market circle. With the fluctuation of prices, the trading bot continuously and automatically places limit orders to gain profit from the spread. It is important to note that intense competition on this strategy can lead to unprofitable trades, especially in low liquidity markets.
The cryptocurrency market is projected to grow much bigger in the foreseeable future. And given the influx of multiple trading bots, you must carry out your due diligence checks. It is equally vital that you research to ensure that you are dealing with an efficient and transparent trading bot company that can give you your money’ worth.