Cryptocurrency trading has gained enormous popularity among professional investors and traders in the past years. Some of the investors who put in their money are people who have had no prior experience in trading any stock, asset, or commodity. But they were eager to try their luck after hearing the stories from people who built their wealth from crypto. Many are looking for ways to earn from the highly-volatile price movements of crypto, but numerous investors have also lost their shirts taking seemingly winning positions.
These unfortunate instances led to the creation of crypto trading bots, which they hope will help them beat market uncertainties. A crypto trading bot is computer software that allows traders to automate some trading decisions. They can do this by setting a specific price point at which they instruct the bot to buy or sell an asset using the money in their trading account. You might want to check out this site for more information on the best free crypto trading bot.
Here’s a beginner’s guide on automated cryptocurrency trading using a bot.
What Is A Crypto Trading Bot
A cryptocurrency bot is a software program that allows you to buy or sell crypto assets without manually performing the steps to execute a trade. It helps you to automate some of the steps involved in crypto trading. But it doesn’t mean that you have to turn it on and it does everything for you. At the very least, you’ll still have to set the triggers for the steps that you want the bot to execute. Some traders have found bots useful for crypto arbitrage operations.
For example, you can ask the trading bot to execute a trade for you, but you’ll have to tell whether it’s a buy or sell position and for what asset. You can ask the bot to notify you when the price of a specific asset that you’re watching out for hits a certain price level. If you already have a position in the play, you can tell it to unload or sell the asset when it hits a certain price level.
Crypto trading bots use an Application Programming Interface (API). An API is a software intermediary that enables two separate software applications to talk with each other. These software applications can execute some trading positions for you, but you’ll have to set a few things to trigger it into motion.
Are you wondering how the bots do this? They do this by connecting to the website or mobile application of the trading exchanges where you have your existing crypto trading account. The software running the crypto trading bot typically uses multiple algorithms that automate the trading for you. If you know how to set the triggers for ‘stop loss’ and ‘take profit’ buttons, it can execute trades and unload assets for you at predetermined price points, even when you’re asleep.
How A Crypto Trading Bot Works
The stark reality is that most investment funds have never outperformed the major indices. It happens even when most of them are professionally managed by fund managers with decades of investment and trading experience. They’re also supported by research and analysis from teams of individual analysts, institutional traders, and investors.
The principal reason it’s difficult to beat the market is that it also uses trading bots. They use software programs trained with trading algorithms to take positions that would make a killing in profits. They have so much money that the volume of their trading positions can swing the market trend in favor of the positions they take.
There are two basic ways by which a trading bot can help a trader gain more profits:
- It can send signals or notifications to the trader when the price hits a certain level that the trader has been waiting for; and
- More than that, though, it can even execute buy or sell trading positions, but the trader has to set the asset, price, volume, and trading position.
Traders who want to decide on whether or not to push through with the scheduled trade usually opt for the first option. It tells them the asset has hit the price they’re watching out for. Crypto traders who do day trading usually prefer the first option as it gives them intraday notification without deciding for them.
On the other hand, traders who manage multiple accounts with numerous positions prefer the second option. It allows them to execute trades that buy or sell at predetermined price points. It can also track many other things for them. It can track trading volume, demand, moving averages, the relative strength of the trend based on buying or selling pressure, price movements, and plenty of other variables.
One of the main advantages of using a crypto trading bot is that it can execute a trade at the exact price point that you set, even if you’re busy doing something else. You can set your command using a simple stop-loss or take profit function.
The moment the price point which you set happens – either to stop loss or to take profit – the trading bot will execute your instruction at that exact moment. It removes the influence of emotion or hesitation, which can sometimes cause a trader not to go through with a trading decision if it had to be done manually.
Most cryptocurrencies are highly volatile. There are no established explanations on what fundamental conditions and factors exert the strongest influence or pressure on their price movements.
Another important consideration is that the cryptocurrency market doesn’t sleep. It also doesn’t go on holidays or weekends. It’s open 24 hours a day, seven days a week. Meaning, that traders have to be alert because anyone can open or close positions at any time of the day, from any part of the world.
Common Features Of Trading Bots
Most investors and traders who’ve been trading cryptocurrency for some time now usually go for the bot that can perform almost everything that they’re looking for in a trading bot. There are crypto trading bots that are available for free. As long as your computer or phone meets the specific requirements, you’re good to go. Some bots, though, require payment of subscription fees, so you still have to check which one is most suitable for your needs.
Here are some of the most common features of crypto trading bots:
- Analyzing Market Data – Most crypto trading bots gather raw marketing data from various sources and then try to decipher it by looking for trends and patterns. It does this by processing the raw data. It sends the raw data through a processing function to create trading signals, which it then sends to the trader through trading notifications. It could also send recommendations on what assets to buy or sell.
- Calculating And Predicting Market Risk – Most crypto trading bots also have a feature that enables the trader to calculate the risk factor in the cryptocurrency trading market. It does this by processing the existing raw data obtained from market information. It then uses its pre-programmed algorithms for risk calculation to process the raw data and comes up with recommendations on which assets to trade and how much.
- Automated Trading Of Crypto Assets – Another common feature of cryptocurrency trading bots is that they use API to execute trades on their own based on the initial trading instructions of the trader. It does this by making its risk calculations on which assets would turn out profits under existing market conditions. Some bots would even recommend the exact volume that you should buy or sell of specific assets.
Methods Used By Bots And Trading Strategies
The APIs used by the different trading bots work in various ways – some crypto trading bots employ an internet browser plug-in. It enables the trader to give instructions to the bot from the browser interface. But other trading bots also have their standard operating systems. It requires the trader to download the crypto trading bot as a desktop or mobile app. There are also crypto trading bots that require using an entirely separate software that’s programmed for use in crypto trading exchanges.
Crypto trading bots also vary in the trading strategies that they employ.
- One of the most common methods used by bots is to track the exponential moving averages. Moving averages can be set for 20 days, 30 days, 50 days, 100 days, and 200 days. The moving average tracks the price average for the period involved. Some bots are programmed to execute a particular kind of trade when the moving average moves beyond a specific price point which has been identified as a threshold point.
- Some bots employ a variant of the exponential moving average (EMA) as their indicator for price movement trends. Examples of this are the double EMA and the triple EMA. A double or triple EMA combines data from more than one moving average to decide when to buy or sell a crypto asset.
As with any asset trading market, there are no guarantees of gaining profits from cryptocurrency trading without being exposed to risk. The high volatility of crypto price movements presents numerous opportunities, but it’s also fraught with dangerous risks if an investor takes the wrong position. The creation of crypto trading bots has been an immense help for those who don’t want to worry about keeping watch over their assets and trading positions.