What Is a Crypto Trading Bot and Why Should You Use One?
A crypto trading bot is a script executed on a server. In essence, a bot is a set of instructions that will be followed by a machine. While it is possible to do everything manually, some advanced trading systems require automation or benefit from it greatly. For example, statistical arbitrage is a strategy that can be effortlessly used in the crypto industry thanks to the wide variety of interconnected financial assets available to investors. However, doing statistical arbitrage manually is a chore and requires constant presence of a manager.
An automated trading bot can significantly reduce idle time, improve operational speed, and remove many downsides of manual trading from the equation. Let’s take a look at some of the issues that automation can solve:
- You don’t need a team of traders. Executing complex strategies like statistical arbitrage usually requires multiple people since you need to place massive amounts of orders simultaneously or in quick succession. Bots can do this easily.
- The human factor. People tend to make mistakes or hesitate. It leads to financial losses due to missed opportunities or simply incorrect market positions that deviate from your technical analysis strategy. Robots never make such mistakes.
- Time management. Many humans struggle to stay awake or alert during peak hours in certain regional markets. When Asian markets start trading actively, the US market usually sleeps. It means that you must be ready to capitalize on favorable circumstances at any given moment. Unfortunately, people need to sleep and rest. Machines don’t.
- Strategy execution. Even the simplest cryptocurrency trading bot works by tracking several market metrics and reacting with lightning speed when conditions for a good market entry align perfectly. Many complex technical analysis strategies require users to analyze outputs of alert systems and double-check them before executing. Bots can do this instantly.
Remember that contemporary trading software exists to enhance your expertise and trading routines. You should use automation when you have a good idea about how to trade efficiently. If you don’t have a solid grasp on the crypto market, you should consider using simpler forms of automation like DCA bots, GRID bots, and copy trading. These systems are designed to cater to newcomers without any prior exposure to financial markets.
How Do Crypto Trading Bots Work?
Any automated system has three key components that make it work. While these components may vary significantly, the general sequence of actions performed by a trading system stays the same. In the most basic form, these three forms can be explained as follows:
- Signal generation. Any algorithm requires a condition that triggers its execution. In our case, we need a trading signal that will tell a bot that it must start placing orders according to its instructions. These signals can be inputted manually by a human or hooked from an automatic platform like TradingView.
- Server. A bot is a script ran on a local machine or in the cloud. Most contemporary bots work in the cloud as many companies offer automation in the form of a Service-as-a-Service product. A script has to be triggered by a signal and send its commands to the API of your chosen brokerage platform or a centralized exchange.
- Trading platform. All trading orders placed by bots must end up somewhere to be executed in the market. The crypto market is unique in many ways. It has a variety of exchange platforms including decentralized and centralized entities. The latter are commonly used in tandem with automation.
CEX platforms usually connect to third-party service providers via API integration allowing other systems to interact with them bypassing the user interface. It makes bots much faster compared to users who have to use the GUI which is drastically slower compared to direct communication between fully automated systems.
This approach to algorithmic trading is all about removing any inefficiencies. Trading bots are not designed to exclude humans from the trading process. You still need to perform market analysis and look for arbitrage opportunities. A machine cannot choose the right set of technical analysis indicators or identify which assets will be best suited for an arbitrage strategy.
Market analysis
The human part of the equation is still incredibly important. While bots eliminate many weaknesses that we have in terms of speed, determination, and precision, they still cannot be burdened with decision-making. Market analysis for any automated system is something that you must convey on your own. Thankfully, we have the technology!
Traditional approaches to technical analysis include a wide range of different technical indicators. Just three decades ago, many analysts used only basic tools like candlestick patterns and support/resistance lines. Today, you have all sorts of analytical tools that can be used to create a consistent market forecasting system.
Let’s talk about two main metrics widely accessible to contemporary retail traders on platforms like TradingView:
- Price action and moving averages. Automatically drawn on any price chart, these curved lines allow retail traders to see currently forming price trends. This indicator uses only price action as its source of data. Its simplicity is the main reason why everyone uses it. A combination of three moving averages with different periods is a staple tool in the arsenal of all analysts. When these lines cross, it means that the trend is weakening. When they diverge, it means that the trend is getting stronger.
- Volumes analysis. Volume is the second metric used by all technical indicators. It is the number of trades performed during a certain period chosen as your time frame. Volumes can be very telling when trying to understand the current direction of the market. For example, when prices jitter at low volumes, you don’t have to worry about implied long-term volatility. When volumes increase alongside a strengthening price trend, it can be indicative of a long-term bear or bull movement.
Arbitrage opportunities
The simplest form of arbitrage is direct price comparison between different trading platforms. When you see price differences across exchanges, you can make money on this difference by buying on one platform while simultaneously selling on another.
Another form is triangular arbitrage when three pairs of financial assets are involved in a trade. The imperative condition is that two of these pairs must share a single asset. For example, you may have BTC/ETH, ETH/USDT, and BTC/USDT. When prices diverge in one of the pairs, you can quickly capitalize on the difference of values occurring in other pairs. Market may lag behind depending on volumes and available liquidity.
Triangular arbitrage is very prone to price convergence since you usually must identify opportune moments on the same spot market, but if you run multiple bots simultaneously, it is possible to make money consistently. The triangular arbitrage trading is theoretically riskless. However, some technological risks may prevent you from making money (for example, order queue not adequately refreshing on the CEX server).
As in case with many other low-risk strategies, you need to launch an army of bots to achieve consistent returns. With contemporary automation platforms like WunderTrading offering their corporate and individual clients their cloud-based services, it is possible to run complex arbitrage strategies with hundreds of bots.
Technical analysis indicators
When it comes to producing signals for you bots, you should be looking at building a strategy that can be deployed on a TradingView chart. This platform allows you to run a trading system that will produce alerts for your robots. You may use a wide range of different indicators to create a great system.
Here are some of indicators that you may be interested in:
- Relative Strength Index (RSI) is one of the most commonly used technical indicators. It is a tool that uses price action to identify some characteristics of a current trend. It is represented by an oscillating line between values “0” and “100”. When the line approaches the upper limit, it means that market is overbought and there should be a reversal. The opposite is true for cases when the line approaches zero. If the line is in the middle, the current trend is strong and may not change very soon.
- Moving Average Convergence Divergence (MACD) is a tool that can tell you a lot about the current price trend and its strength. It uses two different price-action moving averages to identify when there is a good moment to wait for a reversal. When these lines diverge, the market is entering a lengthy bullish or bearish trend. When lines start converging, you should prepare for a reversal or a significant price retracement. MACD is often used together with RSI and Volumes to confirm signals.
- Bollinger Bands (BB) is a great tool for visualization of the current price action and potential price changes in the nearest future. It can also be used to calculate current and implied volatility. A price-action Moving Average is plotted on the chart with low period. Bands are formed by plotting lines that are 1 standard deviation above or below the MA. The lines form a channel around the price line allowing you to see potential volatility limits.
API integration
The last part of an automated trading system is API or Application Programming Interface which is used for direct cross-platform communication. The biggest advantage of this particular communication method is that it allows two different technological platforms to interact without engaging with graphical user interface and other elements of the digital infrastructure that slow down the exchange of data.
What does it mean for crypto trading bots? Exchange APIs used for executing trades and retrieving market data in real-time allow two other components of an automated trading system to work without any lag. Bots can receive triggering signals and execute their instructions in a blink!
The Pros and Cons of Using a Crypto Trading Bot for Your Investments
Automaton is an elegant solution to one of the biggest issues for contemporary investors — the slow pace of order creation. Modern trading platforms can instantly execute any order. The real bottleneck is in the process of receiving the data, analyzing it, and creating a market order based on this analysis.
It would be quite fast if retail traders did not have to work with hundreds of assets to make profits consistently. It is simply impossible for a human to analyze all financial assets that can be traded at any given moment and arrive at a good enough conclusion to open a market position.
Automation makes this problem go away. Services like TradingView fully automate the analytical process. Technical analysis is quite straightforward for many speculative assets such as cryptocurrencies. Platforms like WunderTrading allow users to automate the decision-making and order-creation processes by receiving signals from TradingView and reacting to them instantly according to their instructions.
While it may seem like using automation is a completely riskless enterprise, some issues must be acknowledged by careful investors. Let’s talk about pros and cons of using bots for your investment activities in the crypto market.
Pros
- Improved speed, reaction-time, precision, and decisiveness.
- You can run complex strategies with multiple indicators and advanced analytical tools.
- You can work with multiple financial assets while running several different types of bots.
- Automation can be used as an efficient way of diversifying your investments.
- Bots make sophisticated multi-faceted strategies like statistical arbitrage possible to run by individual traders.
- Contemporary automation services are relatively cheap and can be used by any retail trader.
Cons
- Visualizing risks can be quite hard for newcomers who never used automated trading systems before.
- The process of setting up bots and technical analysis strategies can be time-consuming.
- You still need to understand market analysis and basic principles of trading on financial markets.
- People without any technical expertise may find themselves struggling to understand how to write scripts or use Pine Editor on TradingView.
Are Crypto Trading Bots Worth Using as an Investor?
The crypto market features over two thousands different tokens actively traded on hundreds of centralized and decentralized exchanges. It is possible to make money and secure long-term profitability by working with just a few selected financial assets, but you will be positioned for success even better if you can incorporate more asset types in your portfolio.
Many retail traders usually find themselves struggling to identify the right balance of assets in their portfolios because they cannot really dedicate enough time to analyze every single asset. Technical analysis is something that can be utilized to make market forecasts without exploring every single minutia of targeted assets.
What it means is that many investors who want to achieve success have to use a wide range of technical analysis tools and work with hundreds of different assets to create a balanced portfolio that can perform during all sorts of market conditions. Automation is the right way to this active financial management style. Before, only huge corporations could run advanced multi-layered trading strategies by hiring traders. Now, individuals can do this by using algorithmic trading bots.
Crypto trading software can be extremely useful to all types of investors, but you must remember about some important aspects to using automation in your investment practices:
- You need to manage your personal finances. Many individual investors lose their money and never recover because they overinvest. It is not a good idea to risk everything you have on an idea that automated trading software will make you money faster and better than a hired investment manager. Invest only as much as you can afford to lose.
- Crypto bot trading is just a tool. Many believe that automation is a modern money-making cheat code that allows users improve their financial situations without any risk. It is not something that will just work without any meaningful inputs from its user. Bots are as good as people who create and run them!
- Learning is still very important. If you think that you know how to use a trading bot, think again! The industry is changing every single day with new exciting instruments and products appearing on various automation platforms. You need to learn how to write good scripts and use new instruments like artificial intelligence and machine learning!
The main takeaway
If you want to engage in bot trading, we highly recommend studying how these tools work on platforms like WunderTrading and TradingView. Use free bots available to registered users and start experimenting today!