Crypto Trading Bots – Concept, Basics, Standard Building Blocks, Types, Strategies & more

Our prime focus for this article is Crypto Trading Bots. We help you know everything there is regarding the same, in this one stop page.

After knowing so much about cryptocurrencies, one thing all of us know is that cryptocurrencies are a tricky affair. Unlike the stock market, the cryptocurrency market doesn’t close. 

Ideally, it presents a stressful situation for both newcomers traders and experienced traders.

When people come to know about volatility, they tend to put off the topic of trading under cryptocurrency. 

Ideally, none of us want to deal with huge losses. Additionally, the main reason for volatility is that price fluctuates every now and then, like in the space of minutes. 

Investors can get into cryptocurrency trading from any part of the world and at any time of the day. 

About Trading Bots

You can say trading bots are new. Back in the early 2000s, they were introduced. Under this guide, we shall discuss more about trading bots.

Ideally, trading bots are automated computer-based algorithms that help in buying and selling cryptocurrencies at the right time. 

The main agenda of the trading bots is to generate the maximum amount of profit for their users. All they do is react as per the market rules and monitor the market continuously. 

You can choose the size of your bot as per your taste and preferences. The bot you choose is most likely going to determine the different market actions, including volume, price, and orders. 

In simple terms, you can say these bots help in carrying out the transaction on behalf of the human traders. 

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Why are Trading Bots needed?

To achieve perfect trades, investors are ideally not able to react quickly to price changes.

Further, the problem gets worse because there are some slowdowns in exchanges and transaction times are also slow. 

Adding on to it, investors are not able to invest so much time in trading, which is essential to achieve the benchmark trade. 

Hence, if investors want to make a profit truly, they need to be monitoring the exchanges round the clock.

Well, you don’t need to stress as trading bots are the solution to this problem. No doubt, cryptocurrencies have taken the world by storm.

Now both traditional and retail investors are looking forward to earning additional value by using advanced technology with a trading strategy. 

In the past few years, learning to trade with all types of the asset has become a trend.

You can easily do it with online learning tools, thanks to the stunning technological developments. It is ideal for both new learners and traders from different backgrounds.

Here is where the trading bot comes into play and helps the traders in saving time and also helps in making trading quite efficient. 

Trading bot in the crypto world can remove the trouble of portfolio construction and execute a trading strategy in a volatile or fast-paced market.

What are Crypto Trading Bots?

Richard Donchian, in 1949, came up with the concept of automated trading strategy. Under this system, he had defined some rules with regards to selling and buying. 

In the 1980s, prominent traders, including John Henry, started applying the law based concepts.

Since then, trading bots are quite popular in the market. Ideally, they are pretty expensive, and average investors don’t think about buying them. 

The common uses of trading bots include investors can make the entire process simple and easy.

Ideally, the bots tend to consider some of the factors, including portfolio diversification, index construction, portfolio rebalancing, and a lot more. 

In the secondary use, the bots tend to beat the market to make profits consistently. But one thing is for sure you need to do a lot of research before applying bots to your trading plans. 

The only reason trading bots are more prevalent than ever is that the crypto market is not only open 24*7 but also extremely volatile. 

Above all, you can say trading bots are incredibly vital because traders who trade in Bitcoins choose to sell passively and are not able to dedicate the time required. 

Hence to conduct trading efficiently, we say trading bots are extremely useful. 

Technology behind Trading Bots

Ideally, trading bots are computer programs that aim to make a profit by buying and selling various cryptocurrencies that too at the right time.

But you need to note that majority of the bots are not profitable. 

These bots do generate profit, and the same is higher in the risk adjusted terms as compared to the ones who you had just bought and held. 

Often the software programs leverage artificial intelligence and machine learning. The main aim is to observe the market and execute cryptocurrency trades as per preset algorithms. 

If you think that earning profit is your only goal, then all you need is high risk-adjusted returns, and basically, it is the only potential of a crypto trading bot. 

Additionally, it can make the most of the upside of cryptocurrencies with risk reduced exposure. Hence it makes a great proposition as compared to the simple passive buy and holds strategy.

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How to choose the right Crypto Trading Bots?

Here are the list of Factors which you should consider before choosing a Cryptocurrency Bots –

Backtesting

Before choosing any crypto bot, you must backtest the same against the market data. Additionally, you need to ensure that the market test is realistic.

And the same can be possible if you consider some things like latency, slippage, trading fees. By accessing the exchange, you can collect high-quality data.

Strategy Implementation

It is crucial for you to follow this stage because here, you will determine the particular logic and calculations which will help you choose when and what to trade.

Once you need to create the strategy, you also need to backtest the same to understand its performances.

Execution

Here you need to execute the strategy in real-time. The logic which is hardcoded by you is now converted to API requests which the exchange can understand. 

Job Scheduler

Here you finally automate the entire process in the real world after hard coding the strategies and testing them out. To automatically execute, all you need to do is set up a job scheduler.

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When do you need a Cryptocurrency Bot?

Well,  before choosing any trading bot and coding the same, you need to follow some rules for sure. Like with automation, you can’t take your hands off completely. 

Additionally, with due diligence, you also need to take care of the little things. These time-consuming tasks are quite repetitive, and they might even be complex at times. Hence the automation is vital. 

Things that you can improve with trading bots are:

Repetitive Tasks

These tasks tend to consume a lot of time and effort. You can copy and paste virtually some tasks with the trading bot and conduct trades without any stress.

Periodic rebalances are one of the best ways where bots can help with reputation. You need to rebalance your portfolio regularly if you wish to conduct rebalances.

You can set the alarm at the periodic interval and, in the process, lose your sanity. Till the end of the time, you can create a trading bot and program the same for rebalancing.

Timing

It is highly crucial for you to achieve a great degree of accuracy under your trading. All the trades have a significant impact on your potential earnings.

If you do it manually, then you need to study the chart manually. On the other hand, with bot trading, you can easily program it to monitor the trade. 

Day Trading is a full-time task

The worst part about day trading is you will have a lot of headaches as you will be glued to the computer screen reading a plethora of charts.

Additionally, there are a plethora of tasks that are repetitive in nature. Hence bot trading is vital for you as it can make your trading much simple by effectively conducting repetitive tasks. 

Market is always open

As of now, we know that the crypto market doesn’t shut any day. There are a plethora of exchanges that offer services 24*7.

It might sound unusual, but in reality, prices also change in the blink of an eye. Hence, the trading bots can implement strategies while you are sound asleep.

Types of Cryptocurrency Bots

Check out the various types of cryptocurrency bots available for trading –

Arbitrage Bots – these bots are ideally hardcoded with an arbitrage strategy. They determine the price across different exchanges and conduct trades.

Market Making Bots– To net in profit quickly, these bots place different buy and sell order.

Technical Trading Bots– If you are a conservative trader, then this trading bot is your best bet. To predict the future price, these bots tend to use indicators and signals.

Crypto Trading Bot Strategies

Here are the various strategies you can set in Crypto Trading Bots or Normal Trading Bots –

Mean Reversion

The strategy depends on a simple assumption. That is if the price of the coin moves from its average then it will surely revert back.

Ideally the assumption is true for both typical and cryptocurrency markets. The overall market psychology is the main reason behind this.

For example you have average price $1 of the cryptocurrency X. The traders are most likely to sell off the asset in wholesale if the price rises to $1.25.

On the other hand, the market will see this if the price falls down to $0.75.

Momentum Trading

It judges the flow and ebb of the market through the momentum. The perfect scenario is to ride a positive momentum wave.

Additionally, the main philosophy behind this is belief that prices of asset will move above the average. The timing of buy and sell plays a crucial role in this case.

Arbitrage

In different exchanges the price of an asset varies greatly. Fragmentation is the main cause of this across different markets.

You are most likely able to make profit with this strategy because you will be buying and selling at the same time.

Crypto Trading Bots – Conclusion

When it comes to generating profit from an investment, cryptocurrency trading bots can be quite helpful. If you choose to do almost everything manually, then it can lead to a lot of stress, boredom, etc. 

But when you select bots, then you need to know that not all bots follow one size. Before choosing a bot, you must carefully study these requirements and ensure it meets all. 

No doubt, there are a plethora of advantages of using crypto trading bots, but you must only use them to avoid time-consuming activities.

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