A Beginner’s Guide to Crypto Trading Bots

The cryptocurrency market is an extremely volatile market. Its highly fluctuating nature can really be a pain for an investor. This can be very stressful and nightmarish to wake up in the morning only to find that a significant quantity of your money is lost.

Nevertheless, this volatile nature is very beneficial for a trader. Investing in the market at lower prices and then offloading the risk when the market is high. It would be easier if we could employ an automated technique for the whole process. This is exactly what the cryptocurrency trading bots do.

Crypto Trading Bots

These are computer programs that are designed in such a way that they can automatically buy and sell various cryptocurrencies at the best time on your behalf with the sole purpose of generating profit for you.

Sure, the purpose of the bot is to generate profit but this doesn't imply that it definitely will. Also, the profit must be consistent. It is better to have daily returns of 1% every day with an overall return of 250% across the year, rather than an overall 500% return with a number of negative days. When your profits are consistent, the risk level is significantly low.

Even if the second way earns you a comparatively greater amount, you must still pick the former. Remember that your goal should not be to have a high return, instead, it should be to have high risk-adjusted returns.

How do the bots work?

Most crypto trading bots work with 3 main parts:

Signal Generator

This is where the bots make predictions. Some data is fed into the signal generator which it analyzes and generates buy or sell signals in return. This is exactly what a trader does by manually analyzing the market. The signal generator automates this process to provide faster and better results.

Risk Allocation

This part of a crypto trading bot takes in the buy or sell signals and decides how much capital to invest. For instance, it decides whether you should invest all your funds in a single go or just invest a portion of it. After the decision is taken the next and final step is to execute the trade.

Execution

This is the part that actually sells or buys on your behalf. Execution is a tricky step and if done wrongly, then it won't be good for your pocket. You surely don't want to get a bad bargain because of your bad timing or poor market analysis.

All three parts- signal generator, risk allocation, and execution require their own specific algorithms and optimization process. If even one of the parts of the bot you employ to carry on your trade doesn't work appropriately, it won't help you in making money.

Trading Bots over Humans?

The crypto trading bots shown here are automated and can do many such things that are beyond human reach.

• 24/7 operational

We, humans, need sleep and rest, the bots don't. They can operate the market even at night.

• Faster

A bot's operation time is significantly faster than a human's thinking time plus the reaction time. If you are familiar with online trading, then you'll agree on how great this feature is.

• Emotionless

We humans are susceptible to mood swings, and greed and fear. Often these factors come in the way of our profits. The bots are not driven by such emotions. They will work strictly according to their algorithm and present you with what is best.

• Capacity

The trading bots can process gigabytes of data within a second. We, humans, have quite modest capacity and we are not capable enough to process this much information and certainly not within that time span.

These are the key points why the trading bots are better at trade than humans. The trading bots have consistent behavior and most importantly, they don't get worked up. This is very important for trade. Another point to bear in mind is that a crypto trading bot is only as good as the human creating it.

Trading Algorithms

Momentum

When the prices are up, we think they will rise further. Hence buy. This algorithm has a simple formula- 'buy high, sell higher'. Studies reveal that the momentum strategy doesn't really do well, though when it does, its gains are very high.

Mean Reversion

When the prices are up, we assume that this is due to a pullback. Hence, sell. The success rate of the mean reversion strategies is fairly high. This strategy makes most profit in markets that are both volatile and mean-reverting.

Do the bots really work?

Yes, ofcoure they do.

A lot of people believe the contrary because there is a huge gap between the working knowledge of the professional investors and the hackers who build the algorithms. The trading bot works solely according to the algorithm fed into it. Hence, an efficient algorithm is crucial to your success.

There are numerous firms out there in the market who provide these algorithms but not all of them work. Here are some points you must stress on while picking up a trading bot.

• Look for the professional level of experience of the senior leaders of the firm you are buying the bot from. If they haven't recorded trades greater than $100m, you should probably move ahead.
• Check if the algorithm you are buying is quite famous and openly available for everyone. If so, then whatever edgy feature the bot has, will quickly be replicated and the bot will lose its value.
• Check if their success is aligned with your success. In case you suffer a loss, will the firm cut down their fees for you? Or if you make money, will they prosper too? If you are simply handed a platform and left on your own to figure out things, then this is not a good sign.

Though these points are important, ultimately everything comes down to people. If you get hold of a good trading bot, then things may surely turn into your favor.

The cryptocurrency market is huge and analyzing them for good opportunities and then turning them to your favor is really tedious and a bit too much to expect from a human. A bit automation can do wonders for you! There's a reason why the World Economic Forum predicts that by 2025, more tha 50% of the world's tasks will be automated.