What is automated crypto trading and how does it work?

Time waits for no one and financial markets are no exception. Especially in the uncharted territory of cryptocurrency trading, keeping up with the fast-paced changes in prices is key to success. A plethora of cryptocurrencies, a few viable trading strategies and numerous tools accessible to new traders may all cause confusion. 

Fortunately, technology has made it possible to automate several trading processes, including market analysis, predicting trends and order execution. This frees up more time for strategic planning and establishing a solid foundation for long-term cryptocurrency trading success. 

What is automated crypto trading?

Automated crypto trading, sometimes called automated cryptocurrency trading, is the practice of using computer programs (crypto trading bots) to buy and sell digital currencies on one’s behalf. These software applications are intended to react to market changes to trade at the optimum moment. Furthermore, automatic crypto trading removes the element of uncertainty and emotion from manually buying and selling cryptocurrencies.

Although some newer crypto bots utilize smart contracts and operate directly on the blockchain, most automated crypto trading platforms are still APIs. The term API refers to an application programming interface that allows your account to communicate with a cryptocurrency exchange so it can open and close positions on the user’s behalf according to certain predetermined conditions.

Automated cryptocurrency trading has many advantages over manual trading, including the fact that bots can work continuously without rest. They are also unbiased by emotion, so they will always adhere to their game plan and follow any new market trend or event immediately after it happens.

Several types of crypto trading bots are available, each differing in terms of features, functionalities and price. The most popular ones tend to be arbitrage or grid trading bots. Arbitrage bots take advantage of the price differences on different exchanges, while grid trading is focused on the “buy low, sell high” strategy.

Some automated crypto platforms have different characteristics, such as the hodl function on 3Commas. This doesn’t just trade; it also allows users to buy and hold crypto automatically by buying at low prices. It is up to the user to choose the cryptocurrencies they want and a bot to assist them in doing exactly that.

In general, automated crypto trading goes through four steps: data analysis, signal generation, risk allocation and execution:

Data analysis: In a technology-oriented world, data is an essential ingredient for success, and that’s why a crypto trading bot needs data analysis. Machine learning-enabled software can perform data mining tasks at a faster pace than a human. Signal generation: Once the data analysis is done, a bot performs the trader’s work by predicting market trends and identifying possible trades based on market data and technical analysis indicators.Risk allocation: The risk allocation function is where the bot determines how to distribute risk among different investments based on predetermined parameters set forth by the trader. These rules usually define how and what percentage of capital will be invested when trading.Execution: The process in which cryptocurrencies are purchased and sold in response to the signals generated by the pre-activated trading system is known as an execution. At this period, the signals will generate buy or sell orders that are passed on to the exchange via its API.

Is crypto bot trading profitable?

Though one might think otherwise, manual trading is less popular. In fact, algorithmic trading bots have taken over the financial industry to such an extent that algorithms now drive most of the activity on Wall Street. It is not just crypto that is being traded by bots, almost everything including equities, bonds and foreign exchange is now being bought and sold through algorithms.

The main reason for this shift is simple: Bots can make decisions faster than humans. They are also not biased by emotions, so they can stick to their trading strategy even when the markets are volatile.

Keep in mind that crypto trading bots aren’t perfect and they can’t eliminate all risks. However, they can automate trading procedures to help both new and experienced traders make a profit. To properly configure a bot, it’s crucial to have a basic understanding of the market as well as the regulations and tools associated with trading.

How much does a crypto trading bot cost? It all depends on what features and functionalities a user is looking for. Some crypto trading bots are free, while others can cost a few hundred dollars per month.

Is crypto automation legal?

There is nothing illegal about utilizing a trading bot in any jurisdiction where cryptocurrency trading is permitted. In the traditional financial market, the use of bots is quite common and well-regulated. Machines now execute a large number of stock trades, and the same is true for cryptocurrency trading. A bot is simply a way to trade that doesn’t require a person to execute the trades manually — it isn’t breaking any laws.

However, there are several limitations to this. Some crypto bots are outright frauds, while others utilize shady tactics that could be considered unethical or illegal. Pump-and-dumps and directing consumers to unregulated brokers who may take your money without delivering any service are examples of this. These bots operate potentially outside the bounds of legality.

Do automated trading bots work? The problem isn’t whether they work; it’s how well they operate. Their impact is also determined by a variety of factors, including the platform and bot used, as well as the level of expertise and experience the user has.

Advantages and disadvantages of automated crypto trading

There are a number of advantages that those who adopt automated crypto trading enjoy. Here are some of the most notable benefits of automated trading

Advantages

Minimizing Emotions 

Automated crypto trading systems help to control emotions by automatically executing trades once the set trade parameters have been met. This way, traders will not hesitate or second-guess their decisions. Crypto trading bots aren’t only for timorous traders; they can also help those who are likely to overtrade by buying and selling at every opportunity.

Backtesting

Automated trading systems can be backtested using historical data to generate simulated results. This process allows for the refinement and improvement of a trading strategy before it’s put into live use. When building an automated trading system, all rules must be concrete with no space for biases. 

The computer cannot make assumptions and has to be given explicit instructions on what to do. Before risking money, traders can test these parameters against past data. Backtesting is a method of experimenting with trading ideas and determining the system’s expectancy, which is the average amount a trader can expect to gain (or lose) for each unit of risk.

Preserving discipline

It’s tempting to get swept up in a market rally and make impulsive decisions. Traders can take a methodical approach to their trading, even in volatile market conditions, by following the trading rules set by their strategy. By adhering to these rules, traders can avoid costly mistakes such as chasing losses or entering into trades without a concrete plan.

Improving order entry speed

Crypto trading bots can monitor the market and execute trades faster than humans. They can also react to changes in the market much more quickly than a person. In a market as volatile as Bitcoin (BTC), getting in or out of a trade just a few seconds sooner might significantly affect the trade’s result.

Diversifying trading

Crypto bots allow users to trade numerous accounts or different strategies at the same time. By investing in a variety of assets, traders can reduce the likelihood of loss by diversifying their portfolios. What would be incredibly challenging for a human to accomplish is efficiently executed by a computer in milliseconds. Automated crypto trading systems are designed to take advantage of any and all profitable trading opportunities that may arise.

Disadvantages

Although automated crypto traders enjoy a variety of benefits, there are a number of drawbacks associated with the practice, including.

High start-up costs

When creating an automated trading system from the ground up requires both skills and time. Not to mention, these initial expenses might counteract any gains the system makes. Furthermore, operational costs such as hosting and virtual private server (VPS) services must be paid for regularly to keep the system running smoothly.

Ongoing maintenance costs

Automated trading systems must be monitored on a regular basis for problems such as network outages, software upgrades and unanticipated market events that could disrupt trade execution. These expenses might accumulate over time and reduce profits.

Lack of flexibility

Crypto trading bots are built to follow a set of regulations and can’t adapt to changing market conditions. This rigidity may result in missed possibilities or poor trades.

Mechanical failure

An automated crypto trading system, like any other system, can suffer from technical problems such as network outages, power outages, and data feed errors. These failures might lead to an order being placed at the incorrect price or quantity, resulting in a loss.

Is automated crypto trading safe?

The safety of automated crypto trading depends on the system design and whether trades are regularly monitored. However, they cannot simply be set and forgotten, expecting them to tackle market volatility and spare traders from losses perfectly. They may, however, be a reliable tool that can ease cryptocurrency trading journeys by optimizing processes and allowing 24/7 hassle-free trading. Being automatically emotionless, they help prevent unfortunate decisions relating to losing money due to human error or vice-versa.

Before you pay for anything or put any money down for a trading account, conduct proper due diligence on the projects and platforms and always ask questions to clear your doubts. Otherwise, you might wind up losing money if you don’t.