What makes a good crypto trading bot?
One of the best approaches to evaluating the effectiveness of crypto bot transactions it to compare its factual results to estimates that you received during back-testing. The vast majority of bots underperform compared to the benchmark created by the back-testing process. It happens because the history of the market is different from what is happening in real-time.
Technical analysis works in most cases, but the intuition coupled with fundamental analysis usually lead to market positions that make the most profit. Unfortunately, it is hard to achieve such profitability when using automated trading systems. The goal with ATS is to achieve consistency. You can do so by using different tricks:
- Use very safe strategies and achieve reasonable returns by scaling up. For example, automated trading software can run arbitrage strategies that are, in theory, risk-free. However, margins are tiny in most cases. The only way to ensure that you are making money is to increase the size of the portfolio or use leverage and run a myriad of bots.
- Employ automated trading systems that utilize low-risk strategies. One of the greatest examples is DCA buying. It is a very safe strategy that allows investors to slowly accumulate resources that appreciate over time (like Bitcoin) while reducing the average price of purchases and driving down the cost of investment.
- Diversify as much as possible within the portion of your portfolio dedicated to automation. Diversification on the higher level is quite important. You need to focus on investing in different asset classes. However, within these asset classes, there is room for additional diversification. GRID bots with an aggressive signal generator is a great way to increase the risk profile while hoping for higher returns. You can offset the risk by selecting a well-performing trader on a copy-trading platform.
- Reduce the exposure of your portfolio to risks associated with automation. Many people believe that they need to go all in on automation to make it work. The opposite is actually true. You should use only a fraction of your total portfolio on any type of automation. If you have a large capital, put money in long-term fixed income assets like bonds and real estate. Don’t put all your eggs in the automation basket!
These are all good ways to reduce the risks that usually hinder the effectiveness of an investment strategy utilizing automated trading software.
Which qualities should you look for?
Knowing what we outlined above, we should take a closer look at the problem of consistency. We don’t need a system that will make our financial situation worse than it is right now. What we need is something that can perform. Since consistency depends on your risk style and the ability to reduce the exposure of your portfolio to risks, you need to look for automation platforms that give you a good toolkit to protect your investments.
Here are some features and qualities that a platform must have:
- Scripting flexibility. Customizing your bots is extremely important for any retail trader. If you can change take-profit, stop-loss, and sequencing values, you will be able to fine-tune a bot to your liking and risk tolerance.
- Integration with excellent exchanges. Some CEX platforms are better than others. If you tested an exchange and trust its technology, you should be able to connect your bots via its API effortlessly. A good automation platform will be partnered with some of the best centralized exchanges out there.
- Integration with TradingView. This analytical platform is one of the biggest instruments that a contemporary retail trader possesses. You need this charting tool to build technical analysis strategies that will help you reduce risks on the initial stage of the trading process — market assessment and forecasting.
These features will be instrumental in building a good automated trading system that can generate profits reliably. Let’s talk about some types of bots that you may be interested in using in 2024.
Distributed Cost Average or Dollar Cost Average is a system that allows investors to reduce average prices of assets in their portfolio by splitting any purchase into multiple market orders spread across a certain period. DCA is a widely used by the crypto community. Many enthusiasts are buying Bitcoin using this method to amass as many coins as possible.
DCA bots work differently and usually place multiple orders (long or short market positions) without closing them. It is a great approach for trading on the spot market where you can simply hold assets for as long as you like and sell them at an opportune moment. DCA is not the best of approaches for leveraged positions.
Whether you need to build a massive portfolio of certain digital assets or create a strong multi-layered market position, you will be able to do so using the distributed cost average approach. Since the crypto market is on the rise in 2024, it is a good idea to have several DCA bots ready to launch at any moment.
The best moment to activate these bots is during bearish trends and long price retracements after a bullish movement. It is possible that the crypto market will start losing value across the board during the winter. Be ready to launch your DCA bots when prices start to go down.
These bots are used by many retail traders who want to make money during periods of volatility. GRID is a preset product offered by WunderTrading and some other platforms. The system creates multiple market positions when conditions align perfectly and immediately place take-profits and stop-losses according to its instructions. The resulting sequence of orders creates a net on the price chart, hence the name “GRID bot”.
These bots protect market positions with strategically placed stop-loss commands and do not overstay their welcome in the market by using adequate take-profits. You can adjust them as you see fit, but default values should be tested before you start tinkering with the preset.
GRID bots can be very efficient for intraday traders who usually rely on series of market positions to generate profits within a single trading session. Since GRID bots are immediately protected by a stop-loss, you can run a safer strategy by regulating TP and SL limits. Many retail traders also reduce the delay between orders to further increase the turnover throughout a trading session.
Arbitrage is one of the safest ways of trading financial assets. Some people believe that the best crypto trading bots are the ones running arbitrage systems. There are two main types of arbitrage in which many retail traders engage to create systems that can protect their portfolios from risks associated with using approaches like scalping or aggressive swing trading.
Cross-platform arbitrage or spatial arbitrage is a strategy that made FTX founders millionaires even before they started meddling with clients’ funds. The idea is to find two markets with diverging prices for a single asset. Bitcoin can be priced highly in the US, but may have a lower price in Japan. By selling in the US while simultaneously buying in Japan, you make profit instantly. The same can occur between two different exchanges.
Triangular arbitrage, which is the most common form of arbitrage used in the crypto domain, is a more complicated method involving three different assets forming three pairs. For example, you may look at three pairs formed by ETH, USDT, and BTC. When BTC does not change the price against USDT and ETH, but ETH gains or loses its position against either, you can simultaneously make a two-sided trade to make profit.
Since arbitrage takes into account the actual price of assets and performs the necessary swaps instantly, you don’t risk anything. However, identifying good opportunities for any form of arbitrage can be extremely challenging considering that everybody else is doing it and that prices converge quickly due to the interconnectedness of the crypto market.
Using automated trading software for statistical arbitrage
Experienced fund managers often employ statistical arbitrage as their way of creating a balanced portfolio. This approach is labor-intensive and requires dedication on the part of an investor to produce good results. You need to find groups of assets that have similar (correlating) properties defined by the behavior of their prices. These should be balanced by another group of assets with opposing correlating qualities.
For example, you could group together some L-2 Ethereum ERC-20 tokens which usually behave similarly and pit them against Cardano (ADA) and associated tokens. By placing multiple market positions, both short and long depending on the asset type, you can create a balanced portfolio that will generate profits regardless of the overall market situation.
The theory behind this strategy is solid and has been proven right many times by many financial institutions. However, we must remember that we experienced two unusual booms in the end of the 1990s (the .com bubble) and in the beginning of the 2000s (the web 2.0). Now, venture capitalists and many conservative investors are less interested in betting on risky startups.
Statistical arbitrage can be done by individuals, but it requires an extensive use of automation to increase the speed of order placement and improve the analytical process. Even with the top cryptocurrency trading bot at your disposal, you will still need to lay the groundwork and make large-scale preparations:
- Creating a complex technical analysis strategy that can be easily scaled up is quite challenging, but has to be done before you start running the strategy.
- You will need to create bots for every single asset that you include in the portfolio to ensure that the balance in maintained at all times.
- Calculating exchange fees and other commissions can be very time-consuming as you need to think about the right size for each order.
Identifying assets that correlate and can be included in the portfolio takes times on research and back-testing.
You may try using two different approaches to build a strong statistical arbitrage system:
1. Focus on preparing everything before launching. It is a very costly enterprise in terms of time and effort, but you will be able to test the system as a whole instead of trying to adjust it gradually without seeing the full picture.
2. Start slow and add new assets along the way. The step-by-step approach is a valid method of building a sophisticated statistical arbitrage system that slowly grows and expands. However, it is harder to evaluate and analyze as a whole.
Some experts believe that using fully customized automated systems is the best way to use digital currency bots. One of the reasons for this line of thinking is that the industry is comprised of unique assets that tend to have greatly varying properties. Forecasting the behavior of certain assets is quite challenging even for seasoned veterans due to multiple reasons:
- Prices are formed for digital assets without a long history to use as a basis for meaningful analysis.
- Most markets are still emerging and do not have sufficiently established rules and patterns.
- Digital assets are mostly speculative making fundamental analysis less effective.
Each coin behaves differently making many traditional risk management techniques crucially important. Using take-profits and stop-losses strategically is a must in a market that cannot be predicted using conventional analytical methods. You also need to build separate technical analysis strategies for each asset and fine-tune them to achieve consistency.
Custom bots allow you to create unique trading systems that account for tiny differences between selected digital assets. If you work with good service providers in the automation domain, you will be able to adjust every single aspect of a strategy:
1. Create unique analytical systems on TradingView using tips and tricks from experienced power-users of the platform.
2. Customize alerts and make a system of confirmations using Pine Editor on the TradingView platform.
3. Adjust parameters of bots on the WunderTrading platform to create unique scripts that will execute your strategy flawlessly.
Note that you need to have technical and financial expertise and experience to build custom automated trading systems that use exotic approaches. If you are new to the industry and want to experiment with cryptocurrencies, trading with preset solutions like DCA and GRID is a much better idea. Alternatively, you may focus on copy trading systems.
Copy trading (social trading)
Contemporary automation platforms offer a wide range of services including copy trading. WunderTrading has a special marketplace where various retail traders, experienced analysts, and even some fund managers offer their services to the community. For a small fee you can start following these experienced investors and copy their trades.
This particular approach to investing in crypto automation is often marketed as the best entry point for newcomers, but it has some downsides that must be acknowledged:
- The past history does not guarantee the same level of performance in the future. A great manager with incredible profitability metrics may fumble tomorrow and lose everything. The market is unpredictable. Nonetheless, chances that a well-performing manager will deliver satisfactory results are higher.
- You don’t have a total control over your digital assets. You may reduce the risk exposure of your portfolio by limiting the amount of assets that can be used by copy trading bots or employing conservative stop-loss commands to protect newly placed market positions.
- Assessing the risk style of an investor is quite challenging before you start following them. While you have the history of past performance and other metrics to base you judgment on, it is still not enough to get a good grasp on the style of any given manager.
These downsides do not negate the biggest positive aspect of copy trading: you don’t need any prior exposure to the crypto market to start investing and using one of the most powerful tools available to contemporary retail traders — automation.
Should you use automation in 2024?
Algorithmic trading existed long before many of modern investors were born and will exist for the foreseeable future. We have to use advanced automation systems to keep up with the rapid growth of the web 3.0 ecosystem. It may look slow right now, but imminent improvements will disrupt many industries with fintech being the first on the chopping block.
Bots appear simple and unnecessary to some investors, but you cannot build efficient trading systems without automation. The crypto industry is simply too complicated and competitive to allow conservative retail traders to flourish. Without diversifying your portfolio and trading efforts with some forms of automation, you will encounter many challenges that are hard to overcome.
There are several important reasons why you should use automation in 2024:
- Companies offering bots as their main products will continue improving the technology and add new exciting features like artificial intelligence, machine learning algorithms, complex trading systems, and more. You must keep in touch with the industry to see the next big thing coming in advance.
- Automation platforms are cheap. Affordability is one of the biggest reasons why every retail trader should use this tool. WunderTrading offers all its registered users up to five bots for free. You can start learning how to build automated trading system and slowly upgrade to flexible paid subscription plans.
- Many successful strategies employed by crypto investors cannot be replicated manually. Statistical arbitrage, large-scale triangular arbitrage, GRID bots for ultra-short time frames, and many other interesting trading methods are simply impossible to run without any automation.
With the accessibility of various products targeting retail traders, it seems like a negligence to ignore these powerful tools and embark on an investment journey equipped with nothing but your understanding of technical and fundamental analysis. We know that having expertise along is not enough in the current financial world.
Integrating bots in your portfolio in 2024
You should be interested in building a portfolio that has some long-term market positions, real assets, and some digital assets managed by automated trading systems. Adding cryptocurrencies to the mix is a good way to diversifying a portfolio without exposing it to the risks traditionally associated with digital crypto assets. You don’t have to hold specific market positions without stop-loss commands.
Adding some of the best crypto trading bots to your portfolio can be effortless and efficient. Simply focus on using solutions that has been proven effective by the community and do not invest more than you can afford to lose.
WunderTrading even offers a nice portfolio management tool that also comes with analytical instruments to assess the performance of your assets. Use this managerial tool to balance the proportions of assets, switch between different strategies, and identify assets that do not perform as well as you expected.
Choose bots carefully and back-test every single strategy before using real money. The year 2024 is one of the most important times to start investing in crypto. It is still early and an efficient trading system can help you make sizeable profits in the nearest future if you start right now!