Automated Crypto Trading: The Ultimate Guide
Cryptocurrency trading first started in the beginning of the 2010s and has been actively growing in popularity ever since. Currently, the crypto market has thousands of cryptocurrencies in circulation and around 300 million cryptocurrency users around the world. Crypto trading is now considered one of the most profitable ways to earn money as a trader. So it’s not surprising that there are so many traders willing to capitalize on short-term price movements within the crypto market.
However, not everyone has the time and resources required to engage in crypto trading consistently. Luckily, this is when automated crypto trading can come in handy. In this article you’ll learn what automated crypto trading is, how it works, the advantages and disadvantages of automation, and how to use automated trading to maximize your profits for a more successful trading experience.
What is automated crypto trading?
Automated crypto trading is a style of trading that involves utilizing specialized software (trading bots) to automatically buy and sell cryptocurrencies when certain conditions are met. Cryptocurrency trading bots allow traders to take advantage of price movements without having to monitor the market on their own.
When you trade without using any automated programs, you have a lot of multitasking to do: watch the charts, analyze the data, use various tools and indicators to find the best opportunities for entering the market, calculate potential risk, place buy or sell orders, etc. All of this can be quite stressful to manage at the same time, and it’s not uncommon for traders of all levels of proficiency to lose focus and miss an important piece of information that can make or break a trade.
However, crypto trading bots are immune to this problem. They can automatically (and much quicker) gather and analyze necessary data and open and close trades if previously entered requirements are met. Automated trading software can help traders save a lot of time, energy and profit for a relatively low price.
How does automated crypto trading work?
Automated crypto trading software is based on algorithms. Algorithms contain a set of instructions and rules aimed to solve a problem. Considering that trading involves waiting for certain conditions to occur, the whole process can be automated by creating algorithms that can analyze the market and carry out trades when the current market conditions comply with the algorithmic rules.
There are many variations and types of automated trading programs. First, you can set yourself an expert advisor (EA). This software analyzes the market according to the settings you set up and gives you trading signals. For example, an EA may look after the RSI oscillator and send you a buy signal every time it reaches the “oversold” zone. Another thing you can use is a bot that trades while you are busy with other things. The bot searches for trading opportunities, opens and closes trades, and manages risks.
Trading bots are external applications and aren’t built into the exchange platforms by default. There are several ways to integrate automated trading software into the platforms, but when it comes to crypto trading bots, the most prevalent are Application Programming Interfaces (API) trading and decentralized trading platforms.
- API trading involves using specific software (APIs) as an intermediary between trading bots and exchange platforms. APIs allow different applications to interact with each other. When it comes to trading, APIs connect a trader’s account with crypto trading bots, which allows them to analyze the market and place trade orders on your behalf.
- Decentralized trading platforms allow crypto traders to trade directly without having to use third parties, providing the most secure way to integrate automated crypto trading software. Decentralized trading platforms are based on the blockchain technology that stores so-called smart contracts. Smart contracts are programs that contain instructions to place trade orders. Once all conditions specified in a smart contract are met, the blockchain will process and carry out the transaction. The lack of third parties present in the process makes trading bots utilizing this technology more secure to use and protect trading accounts from unauthorized intervention.
What exactly can trading bots do?
Regardless of the way an auto trading software is integrated into the trading platform, trading bots take care of the same list of processes:
- market data analysis: in order to carry out successful trades, traders need to analyze market data, and trading bots can take care of that as well. They extract necessary information much faster than humans could ever do manually, and then use the processed data and technical analysis indicators to predict the future movement of the market and find the potential entry points;
- risk allocation: another thing trading bots can do is identify ways to redistribute the capital among different open trades and investments in accordance with instructions left by the holder of the crypto account;
- trade execution: once the program has identified potential entry and exit points, it can place buy or sell orders on the market. Most trading bots focus on buying low and selling high within a predetermined price range, but it’s also possible to use bots that capitalize on price changes between two different exchanges (called arbitrage bots).
Advantages of automated crypto trading
It didn’t take long for automated trading bots to take over the cryptocurrency market and become more popular than manual trading. In fact, even a lot of non-crypto traders have hopped on the trend and started using trading bots to maximize profits from their trades. And there are many reasons why automated trading has gained so much positive attention from traders, and we are going to look at them now.
As we already mentioned, trading is an activity that requires a great deal of multitasking. Trading bots can do many activities associated with trading, from gathering data about the current market conditions to calculating the potential direction of the price movement and executing trades. Trading bots also complete these tasks much faster than humans, which means they are able to execute a trade quicker and without delays as well.
Trading bots, unlike humans, don’t get tired and can work 24/7. The risk of making errors in calculation is also practically non-existent (unless the data entered into the software is incorrect).
Emotions are complex neurophysiological reactions that humans experience in the course of their lives. Emotions are natural and necessary for us as they help us process the world around us and make decisions based on what we feel. However, in trading emotions often hinder the process instead of helping. A lot of traders get attached to their trades, hoping against hope that the market will end up moving in the direction they want. But these emotional attachments do much more harm than good, causing traders to miss good trading opportunities or make bad trading decisions.
Luckily, emotions (or lack thereof) are also one of the main differences between humans and machines. Trading bots don’t get attached to open positions. They clinically follow the established set of rules and instructions, and once the market moves past a certain point, they close the trade without hesitation often displayed by human traders.
If you want to minimize the risks for your trading or investing portfolio, you can try and diversify it by investing your money in a variety of different assets at the same time. This allows you to protect your capital if one of your open trades or investments falls through. However, it is hard to keep up with one market, let alone several, so many traders and investors don’t use this opportunity.
This is another thing trading bots can help you with. They can monitor multiple trading accounts and apply different strategies to different markets. When one position starts to lose, they can quickly detect it and reallocate money to different trades or open new ones. Automated trading allows you to take advantage of trading opportunities across multiple markets without having to endure the stress from trying to juggle several trades at the same time.
Disadvantages of automated crypto trading
Of course, nothing can be 100% perfect, so there are still some drawbacks that traders should consider before using automated crypto trading software.
Trading bots are not free to use, and even though the long-term profit will make up for any maintenance costs, you still should keep them in mind while developing your trading plan. What’s more, some traders would rather build their own system from scratch, which can be more secure but cost much more money to set up, exceeding all the profits the system may bring you. Additional expenses, such as the cost of a virtual private server to ensure smooth and uninterrupted 24/7 trading, should also be taken into account.
Lack of flexibility
Trading bots are made to follow a predetermined set of instructions, which makes them useless in highly volatile markets where prices move too fast and unpredictably for the programs to follow. In these cases, it is better to switch to manual trading and use a psychology-driven strategy to capitalize on market volatility.
Automated trading systems can work 24/7. However, they aren’t safe from disruptions in the Internet connection or power outages. You as a trader should stand by in case these events occur to quickly correct whatever errors your bot may experience as the result.
Automated crypto trading: strategies
There are a variety of different trading strategies that you can apply to your automated crypto trading system. However, before implementing a strategy, it is crucial to backtest it. Backtesting shows whether a strategy is strong or not by using historical data to test it. If by the end of backtesting the strategy brings more profits than losses, then it can be used on the real market next.
As for what strategies to use while using automated crypto trading systems, here are some of the most popular ones that you can incorporate in your trading:
- Grid trading. Grid trading refers to a bot trading strategy that involves choosing multiple price levels to execute trade orders at. Once the price touches one of the price levels, the bot automatically initiates a trade. Each buy order has a corresponding sell order placed a couple of levels higher, which resembles a grid. This strategy is rather straightforward and shows good results in markets with normal price volatility.
- Arbitrage trading. Arbitrage trading bots monitor two different exchanges and capitalize on the differences in prices between them. This strategy involves making highly frequent and fast (sometimes lasting only a split second) trades and is generally associated with low risk, though there’s still a danger of slippage, which happens when the trade is executed at a price different from the requested price due to market volatility.
- Momentum trading. This trading strategy revolves around trading within the current market trend. Trading bots gather data about the volume of traded cryptocurrencies, market volatility, time frame of the trend and to identify its strength and direction. Then, if the data indicates that the trend hasn’t lost the momentum and is still moving in the same direction, the bots will place new trades until the momentum is lost.
- Mean reversion trading. The mean reversion strategy is based on the idea that the price of an asset will always revert to an underlying stable trend after a period of market volatility or prominent price fluctuations. This strategy aims to capitalize on long-term and extreme changes in the price of an asset with the assumption that it will revert back to the previous trend. Trading bots can calculate this trend and plan your trades around it while also taking into account how the current market movement can affect the mean average underlying trend.
Knowing these strategies can help you understand better how automated trading systems work and what they are truly capable of doing.
Despite some imperfections, automated crypto trading is a great alternative to manual trading. Trading bots are incredibly time efficient and reliable, they can help you achieve the results that you never thought were possible.
This is for informational purposes only and does not contain — or to be considered as containing — investment advice, suggestion or recommendation for trading.