As anyone with experience of cryptocurrencies may know, they’re highly volatile. This might not work in everyone’s favor — losing money due to a few rapid changes within a short space of time can be frustrating — but it’s fantastic for most active traders.
You can buy assets at lower costs one day and sell them off on another when there’s less risk, once you know how the market moves. But one technique that’s become increasingly popular for traders buying and selling cryptocurrencies is bots.
This can be a daunting topic for newcomers, which is why we’ve written this crypto trading bot guide. Below, you’ll find crucial details to help beginners hit the ground running.
Understanding how Crypto Trading Bots work
Crypto trading bots are complex programs designed to buy and sell cryptocurrencies automatically. While their design may be intricate, cryptocurrency trading bots’ purpose is incredibly simple: they can make trades at the ideal time and help to bring in more profits for traders.
But not all trading bots available can generate impressive profits. Making one is fairly easy for someone with a little knowledge of computer programming, yet making one that leads to financial reward is anything but.
Ideally, crypto trading bots turn a profit which is greater than that which you could have generated yourself if you handled the trades manually, at least in terms of risk-adjustment. This term relates to the level of risk involved in achieving the relative return, typically represented as a rating or, often, a number. Obviously, the less risk, the better.
The aim should be for smaller, consistent returns with reduced risk, rather than huge returns with a massive risk. You don’t want to invest funds into trades that are likely unstable, as you could lose serious amounts of money. Higher risks can make the entire process of buying and selling more stressful than it has to be.
Good risk-adjusted returns should be the goal. Crypto trading bots help traders make a profit on cryptocurrency buying and selling while mitigating the risks. This is why beginners may find using bots more appealing than seasoned traders.
The best cryptocurrency trading bots consist of the following elements: signal generation, allocating risk, and execution.
What is a signal generator?
The signal generator is responsible for creating predictions. Market data is fed into the signal generator, and a signal for the trader to either buy or sell comes out of the other end.
What is risk allocation?
This element of crypto trading bots takes the signal produced by the generator and determines the right amount to buy. This helps a trader make the smartest decision with their funds, rather than risking their whole capital on an unstable investment.
What is execution?
If a trader has large amounts of coins to purchase, possibly for a long list of clients eager to turn a profit, it’s likely best to split this up over a number of trades rather than a single, massive one.
So, if a trader is using an identical bot to hundreds of other traders, and none of them are talking to each other during the process, it’s likely that they’ll run into unsatisfactory prices. That’s a problem that has to be considered carefully to achieve optimal returns.
The three elements of crypto trading bots require individual algorithms to function properly. A bot which makes mistakes in one or more aspects of the trade can lead to losses down the line, possibly with catastrophic results.
How do Crypto Trading Bots and human traders differ?
There are a number of core differences between trading bots and human traders.
First, bots have the luxury of operating all day, every day, with no need to take a break. They can monitor markets without losing concentration or being distracted. That’s impossible for people. Even if you didn’t have to sleep, eat, shower, and see your family, staring at market data for days on end might drive you insane.
Secondly, bots can make decisions and react to market fluctuations much faster than humans ever could. This means they can act as soon as a valuable opportunity arises, whereas traders might be too slow to take advantage.
Thirdly, crypto trading bots are free of emotions. They won’t become frustrated when the market isn’t quite going their way and make rash decisions in a desperate attempt to turn a profit. They won’t be too afraid to seize an opportunity. They act how they’re designed to.
Finally, let’s talk capacity. Bots have the ability to process huge amounts of data each second, unlike humans. This is why they make such accurate choices.
As you can see, crypto trading bots offer plenty of tangible benefits which make them more effective at long-term trading. They’re more consistent and reliable than even the most skilled human trader.
But we have to remember that even the best bots on the market are still created by people. If the individual or team behind the scenes is bad at what they do, it’s unlikely their bot will be much better.
Another key point to consider is that humans have the ability to think subjectively: when a specific tidbit of information lacks a concrete result, a person may be better at understanding this than an algorithm-based bot.
Exploring the algorithms powering crypto trading bots
Generally, crypto trading bots are built on two algorithm types: mean-revision or momentum.
Mean-reversion is an assumption that an asset’s price will revert back closer to the average or mean. It presumes there’s a stable trend in asset pricing and that prices will all fluctuate around this, in a random manner. With most of the profitable algorithms, traders can expect to see a win-lose ratio of around 70 percent, while gain-loss ratios stand at approximately 55 percent too.
Momentum trading is based on assuming that prices will continue to rise once an upward trend begins. The win-lose ratio in these algorithms tends to be 55 percent and gain-losses are 70 percent.
These are fairly easy to understand, which may surprise newcomers. But there’s one aspect that can’t be forgotten — fees.
The amount of profit your bot makes can be severely impacted by the costs of transactions (which are given to the relevant exchange) and the bid offers. Fees will be further dictated by a bot’s programming — is it a liquidity-maker or -taker? In other words, is it active or passive?
In general, the strongest crypto trading bot algorithms are capable of managing their active and passive trading ratios well, trading over a number of exchanges based on the best transaction fees.
How profitable are bots overall?
If crypto trading bots worked 100 percent of the time, every trader in the world would use them.
While bots can be very profitable, it’s clear that there’s a gap in knowledge between developers creating their algorithms and career traders using them. Anyone looking to utilize a crypto trading bot to achieve profits must be able to set the program up, based on their own preferences and goals. Otherwise, they may struggle to enjoy the results they hope for.
Likewise, developers must know how markets work to create an effective automation program.
Bots can be profitable for beginners, but you need a little market knowledge before you can get them to work for you. As with any technology, trading bots must be used properly to unlock their full potential.
Key factors to consider when choosing a crypto trading bot
There are three main points to think about before you pick a trading bot for buying and selling cryptocurrencies.
First, think about the level of knowledge and experience you have. If you’re a total newcomer to trading, with no clue what any of the terminology or market activities mean, it’s best to educate yourself before you invest in a bot. Otherwise, you could end up configuring it incorrectly and cost yourself more money in the long run.
Second, check whether a bot’s algorithms are available to the public, as these can be replicated with surprising ease by anyone with programming knowledge. As a result, arbitrage could end up destroying the bot’s edge.
Third, find out what other traders at your level think of the bot. Have they achieved the level of success they longed for? Is it accessible to beginners or does it demand expert knowledge to get right?
Choosing the best crypto trading bot for your investment goals is a big decision. You have to feel confident that you’ve made the right choice and are giving yourself a good opportunity to generate profits. Take the time to look at reviews and insights written by like-minded traders before you make your choice.
Research the person or people behind the bot, too. Try to find out whether they seem like a trustworthy source or not. Peace of mind goes a long way to making your trading experience enjoyable.
We hope this crypto trading bot guide has given you lots to think about, and helps you make the smartest decision.