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How Do Crypto Trading Bots Work?
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In crypto trading, churning out profit usually depends on how quickly one ends up buying and selling digital assets. As a result, even a minor delay in these trade-offs can incur noticeable losses. That is why people often consider using crypto trading bots.
As a novice crypto investor, you may not be familiar with how crypto trading bots work and how you can use them. In this guide, we have explained some of the basics of crypto trading bots you want to know. We have also discussed ways to get started with crypto trading bots.
What Are Crypto Trading Bots?
Crypto trading bots are programs designed to automate cryptocurrency asset trading on your behalf. In the typical scenario, you (the investor/trader) have to sit in front of the desk and pick which cryptocurrency to buy/sell and at what time. You should always pay attention to market statistics that play a crucial role in practicing trading.
Crypto trading bots can easily automate the analysis and interpretation of market statistics. They can gather market data, interpret it, calculate the potential market risk, and execute buying/selling cryptocurrency assets. For instance, you can set up a crypto trading bot to purchase more Bitcoin when the BTC price goes lower than a specified limit.
This way, crypto trading bots can often save you a lot of time. It’s almost like hiring an expert to do crypto trading for you while you can sit back and watch the profit grow. However, making use of crypto trading bots is more cost-effective than hiring human experts and gurus.
How Do Crypto Trading Bots Work?
Most of the crypto trading bots have the following key components in common:
- Market Data Analysis
This module of the bot will save raw market data from different sources and interpret it. On the other end, it will decide whether to buy/sell a specific cryptocurrency asset. Many bots allow users to customize which types of data go into the signal generator sector to get refined results.
- Market Risk Prediction
This module also uses market data but to calculate the potential risk in the market. Based on the information, the bot will decide how much to invest or trade. It’s probably the most critical aspect of a crypto trading bot.
- Buying/Selling the Assets
This module of the bot uses APIs to buy or sell the cryptocurrency asset strategically. Sometimes, you might want to avoid buying tokens in bulk. On the other hand, some situations call for immediate purchases. The Execution module takes care of such aspects.
Advantages of Crypto Trading Bots
Following are some of the core characteristics of crypto trading bots:
Trading cryptocurrency assets using a bot is always more efficient. You don’t have to worry about delays or human errors. As long as the bot receives the correct data and has suitable algorithms, it can trade assets with a better chance of profit. Also, these bots can work 24*7.
A trading bot takes every single decision based on data. Unlike humans, it doesn’t have the greed of profit or fear of loss. Experienced traders may overpower their emotions and make rational decisions, but that may not always be the case with or beginners. On the other hand, a trading bot always keeps emotion out of the equation.
- More Powerful
There is a limit to the amount of data a human trader can process at a time. Even if they process all the data, it is tough to reach insights based on that data. However, trading bots can easily handle bulks of data and come to plausible conclusions.
Disadvantages of Crypto Trading Bots
Crypto trading bots are not perfect when dealing with a highly unpredictable market.
Situations like the ongoing pandemic can have an unexpected impact on the market, and you cannot always predict how these Force Majeure events impact the economy. You need a better, psychology-driven strategy to keep racking up the profit. That is one area where you need to trust your instincts since this capability that bots do not possess (as of now).
Similarly, programming errors can also impact the efficiency of crypto trading bots. You must also be extra careful while determining the bot’s conditions and its actions, especially when building your crypto trading bot from scratch. For example, you should teach the bot the ideal time/conditions to make the final purchase. Once deployed, these bots carry out activities at lightning-speed, which gives you little time for rethinking.
Are Crypto Trading Bots Legal?
Yes, you can use crypto trading bots without legal consequences.
How to Start Using Crypto Trading Bots?
You can get started with crypto trading bots in two ways:
- Use a Trading Bot
You can choose one of the suitable crypto trading bots from the market. These trading bot services will integrate with multiple cryptocurrency exchanges and charge you a monthly or per-transaction commission.
- Build Your Trading Bot
If you need customized control and results, you can build a crypto trading bot. You can either develop it from scratch or use a platform that allows you to customize the bot as per your needs. In either case, you have to program it as per your strategy.
Our partner Quadency provides traders with a unified platform that automates pre-built strategies and monitor holdings, courtesy of trading bots that fullfill your requirements.
Another example is Hummingbot. It is an open-source command-line interface that lets you build an automated trading bot. On the other hand, if you need a graphical UI to build your bot, you should check out Trality.
The Bottom Line
While they are not perfect, crypto trading bots can help you trade better when you can program everything right. Bots are an excellent choice for those who cannot spend 24*7 inspecting the market activities.
Just be sure to choose/build the right trading bot for your needs.