The trading process is challenging and requires experience. Moreover, once you learn how to start, the learning process doesn’t stop there. The world keeps coming up with new indicators, oscillators, strategies, and tools. Moreover, traders have to keep up with the news.
All these factors make trading even more challenging, especially if the user chooses cryptocurrency as one of the assets to trade. However, there is a solution: automated crypto trading. It won’t replace the trading strategy, but this option can help optimize it. This article focuses on describing this solution, its benefits, and risks.
Automated or algorithmic trading (sometimes referred to as trading through bots) is a method of trading that automatically executes deals on financial markets using complex computer algorithms. This process entails emotion-free trading since human participation is limited.
It involves creating a set of instructions based on several trading strategies and technical analysis indicators that can instantly execute transactions without requiring human input and produce buy and sell signals automatically without intervention. There are multiple companies that create such bots and allow users to set up instructions to match their trading styles.
The efficiency in crypto trading is reached due to numerous technical analysis tools and assets to trade. For instance, you can use automated trading for such assets as stocks, bonds, currencies (fiat and crypto), commodities, and derivatives. These systems examine enormous volumes of data and make decisions based on established criteria reached through machine learning techniques.
The ability to execute transactions quickly and 24/7 while not having to rely on emotions is one of the biggest advantages of automated trading. Moreover, this solution guarantees backtesting strategies and improves trading techniques. Automated trading has a few risks, such as technical issues in automated trading, programming mistakes, over-optimization in trading systems, and unforeseen market situations that can lead to substantial losses.
Automated trading operates similarly as it does within other financial marketplaces: through crypto trading algorithms. Automated trading in cryptocurrency uses computer algorithms to carry out deals on numerous cryptocurrency exchanges.
First, the trader must choose a platform or exchange that provides API access to an automated trading system for cryptocurrencies. Thus, the platform is connected to trading bots. Next, traders can create or set up trading strategies and algorithms based on technical indicators, market data, and other elements.
The trading bot may automatically monitor the market for trading opportunities once it is connected to the exchange and the trader sets up the strategy. The bot produces buy or sell signals based on the strategy and executes transactions in real-time. Investors can set up automated trading systems to track market circumstances and modify trades in response to shifting market factors like price changes or trading volume.
As mentioned, automated trading is done through bots. However, there are several types of bots investors can use to optimize their processes. To name a few bots that can be used for cryptocurrency trading:
- Market-making bots. These types of bots offer liquidity to various markets by making buy and sell orders at slightly higher and lower prices than the current market price. Thus, they benefit from the price differential between the bid and ask.
- Arbitrage bots. These algorithms purchase assets low on one exchange and sell high on another to profit on price differences between several crypto exchanges. The bot is useful for arbitrage trading because of price swings. Traders can’t detect price swings by monitoring prices 24/7, but the bot can.
- Scalping bots. These automated bots try to profit from minute price changes in the market by placing numerous trades in short periods.
- News-based bots. These programs evaluate news and social media sentiment to produce buy or sell signals based on the market impact of these said news.
- Portfolio rebalancing bots. These programs are based on the idea of maintaining a diverse portfolio, so they are automatically buying or selling cryptocurrencies based on pre-set allocation targets. A portfolio’s allocation can also be automatically changed in response to shifting market conditions.
- Trend-following bots. These algorithms analyze previous price movements and look for patterns that point to a trend to follow the market’s trend. They make buy or sell orders depending on the trend’s direction.
As you see, human control in automated trading enables traders to choose a suitable bot for their strategies. Traders can set up these bots, depending on their goals and risk tolerance.
Any solution has its advantages and flaws, and automated trading through bots is no exception. There are benefits and risks of automated trading. Let’s start with the advantages of automated crypto trading:
- 24/7 trading. Automated trading systems may trade continuously, which can be very advantageous for traders who wish to take advantage of chances on the worldwide market or who are located in different time zones.
- Lack of emotional trading. Bots are not affected by feelings of greed and fear, which can impair judgment and result in subpar trading decisions. Thus, a trader gets better risk management and more disciplined trading solutions.
- Efficiency and speed of decisions. Bot systems can complete trades far more quickly than human traders since they analyze market trends within seconds.
- Optimization and backtesting. Trading professionals can improve their performance and perfect their trading methods by backtesting automated trading systems on collected data.
However, despite these numerous benefits, trading through bots has a few disadvantages:
- Excessive reliance on historical data. Bots rely on previous data, yet past success is not always a reliable predictor of future outcomes. Thus, traders should use these systems with caution.
- Limited flexibility. Automated trading may have difficulties adjusting to abrupt changes in market circumstances or news events that could affect the market because they obey pre-programmed rules. Thus, they are prone to mistakes.
- Technical risks and errors. Network failures, software bugs, and hardware malfunctions can affect automated trading systems and result in losses.
The best thing traders can do is not to rely solely on automated systems when trading. Moreover, it’s crucial to keep an eye on the market and check the trading journal regularly to see whether the bot performs correctly. Overall, automated trading is extremely beneficial since its devoid of human emotion and is based on technical analysis. However, traders should use reliable platforms and exercise caution when using such bots.