Risks of Automated Trading and How to Manage Them

What risks does automated trading bring? Find out as we explore the potential dangers worth considering when you try automated trading for the first time.

 

Most private traders still rely on exchange terminals and manual trading, even as algorithmic trading is generating 90 percent in turnovers for those embracing cutting-edge solutions. Current trading bots are totally different to how they once were: early versions were considered costly to run, not to mention difficult to install and requiring a certain degree of technical knowhow to get started.

On top of this, early trading bots needed a robust server infrastructure to operate properly, but thanks to the proliferation of cloud technology, an increasing number of vendors now offer algorithms as a service for traders.

This online software empowers users with access to quality tools via quick, simple processes. All they need to do is register, establish personalized parameters with a user-friendly interface, and put the trading bot into action. If one bot’s not enough, traders can use two, or ten, or dozens. It’s up to them.

Stable connections between the user’s personal exchange account and trading bot depends on the API access feature. All of the reputable exchanges support this. Once you set your bot(s) up, they can operate 24 hours a day, seven days a week according to the specific rules you put in place.

Trading volumes can grow significantly, as many as between 20 and 50 times that in manual trading. As a result, the number of opportunities to turn a profit swells, too.

But let’s remember: in the real world, new opportunities to boost earnings can include a risk of increasing losses, too. Algo-trading presents its own difficulties, and newcomers must keep these in mind before taking the plunge.

For example, there is a slight risk that a hacker could gain unauthorized access to the bot and steal the API keys. Other risks include algorithm errors, unexpected shifts in the cryptocurrency market, applying the wrong settings, and more. It’s possible that a trader could lose funds or buy a big position in a token with low liquidity.

How to Mitigate Automated Trading Risks

According to our experience of trading with a number of cryptocurrency bots and different platforms, we’ve gained helpful insights that can make for a better experience.

Watch out for black box bots

Beware of so-called “black box” bots promising to help you earn money after you deposit your coins with them through a “smart contract” — genuine bots only operate via your account on reputable exchanges, and you should be able to monitor all of its trades/orders.

Your API keys shouldn’t let the bot withdraw funds from your exchange account — granting it permission to process trades is more than enough for any strategy.

Cap risks wisely

Take care to cap your risk and create a new account on your chosen exchange, to limit your potential losses in worst-case scenarios.

Small steps are best

Take small steps in the beginning and stick to an exchange’s minimum order (the equivalent of $10 on the majority) — run multiple orders at the minimum value to experiment with your bot in a safer way.

Try high-volume pair trading

Prioritize safety and only trade pairs of a high volume, e.g. TOP-10, as they have adequate volatility to allow bots to complete their goals properly and good liquidity to close positions when necessary.

Take a cautious approach

Avoid trying to catch each market movement and set low levels for your trading bot triggers. Between 1 and 5 percent is a smart choice for the majority of newcomers, as market prices should move for a minimum of 1 percent for your bot to execute a trade.

What happens if your crypto trading bot buys too many coins in the midst of a sudden decline in the market? Try:

  • Fixing your loss: Bring your bot to a stop and sell your coins manually instead. The benefit of this is that you’ll release funds for upcoming trades immediately, but you’ll miss out on the opportunity to recover the exact trade, too.

  • Play the waiting game: It’s likely that a market can hit your take profit order and your trading bot will get to complete its task with success. This is a good outcome, as you could still generate a profit, but it also might never happen. The cryptocurrency market can fall further and fail to achieve a recovery, keeping assets locked in undesirable deals.

  • Put another bot into action in the opposite direction and enable it to sell coins you bought during growth in the market: You may view this as a compromise between the aforementioned two possibilities. It’s likely the bot won’t make a profit on all the coins it sells, but you could reduce your position one step at a time.

  • Stop your bot’s actions and purchase more of your trade’s position, while decreasing the average buying price: You should sell your position with lower-level profit — this is generally the riskiest option, recommended for those with decent experience of trading only.

Cryptocurrency holders cannot expect their portfolio to generate dividend payments, in contrast to those involved in traditional trading. This is why automated trading offers a valuable opportunity to turn profits from the market’s volatility without needing to invest more into it.

Algo-trading in the cloud is a trend that keeps growing, and with good reason: it can be considered promising for cryptocurrency holders who make more, and for exchanges looking to boost their liquidity and volumes significantly. However, always think about the potential risks carefully before trying it for yourself.