It is possible to use a margin trading bot efficiently if you have a good strategy or market insights. While running them during periods of significant volatility or as a consistent part of your automation portfolio is not necessary, you should take advantage of leveraged positions whenever possible. Let’s talk about some scenarios when you can utilize leverage in margin trading to maximize gains.
How margin trading works
For some specific market positions you want to borrow funds. Debt is not something inherently bad in general, but it can be beneficial in financial markets. For example, one of the most frequent use case for leverage is short selling. You borrow some assets to sell at the current price and buy them back when the price goes down. After repaying your debt in borrowed assets, plus a commission to a lender, you will be left with a margin denominated in the asset you traded it against.
Here is an example:
- You borrow 1 $BTC at 55,000 $USDT.
- You sell it for the current price and wait for the dip.
- When the price reaches a certain threshold (say, 30,000 $USDT), you buy 1 $BTC back.
- The difference is 35,000 $USDT.
Short selling an asset is one of the most useful operations as it allows investors to hedge against market risks and to create market positions that cancel out their long positions if they are uncertain about the direction of the price in the nearest future. Margin trading also allows retail traders to work with assets that they do not have in their portfolios or work with derivatives like futures or CFD contracts.
Remember that using borrowed funds is extremely dangerous for your portfolio if you do not have a backup plan. Many professional use margin trading techniques only when they want to hedge against various risks or have a very strong belief that the market will crash at some point in the future. Since you need to provide collateral and pay interest on your loans, you should never have a leveraged position open for too long.
How to Use Margin Bots for Crypto?
The world of cryptocurrencies is unique in many ways. However, one of the biggest differences between traditional financial markets and the crypto one is the psychology of participants. The vast majority of individual investors see cryptocurrencies as a “get rich quickly” scheme. It makes assets very volatile as short-term speculation often determines long-term trends.
Crypto trading can be frustrating because you cannot use fundamental analysis to calculate the intrinsic value of any token based on real assets and investments associated with it. Instead, you have to assess the market differently, use technical analysis and social media to get a good grasp on what is currently happening in the blockchain industry. Keeping up with the social media chatter, doing your diligence in regard to analytical work, and trying to wrap your head around hundreds of relevant news stories can be extremely difficult and demanding.
This chaos may sow fear in many newcomers, but experienced investors recognize many opportunities that present themselves in such market conditions. Holding long market positions is preferable for some tokens, but you can also short sell them when you feel that a strong downtrend forms in the market or use derivatives for gains in the nearest future. It is important that maximized gains from trading with leverage come with additional inherent risks.
Note that the size of leverage plays a crucial role in the success of each of your trading operations. You don’t want to overexpose your portfolio to risks and take on a 1:100 leverage threatening to wipe out your margin account in a second if something goes wrong. However, taking 1:5 leverage is often not enough to make meaningful profits. Finding the right balance between risks and rewards while chasing amplified profits is the best course of action if you are interested in efficient crypto trading.
If you are determined to use leverage, you should learn how to use a margin bot. Recent surveys of financial markets indicate that over 65% of all individual retail traders use automation regularly while nearly all (up to 99%) of all institutional investors use bots to trade on a daily basis. As market grows in size and serves millions of users simultaneously, lightning speed reaction and quick order placement become necessary for success.
There are several ways to launch an automated trading system:
- You can use special features on your centralized exchange. Many CEX platforms offer their clients limited automation functionality to open and close positions automatically. While it can be enough for some users who trade infrequently, people who are interested in making money should look into more versatile alternatives.
- Use SaaS platforms offering advanced crypto trading software for a fee. Many companies like WunderTrading have long product lineups and offer solutions like DCA and GRID bots, AI-driven statistical arbitrage, copy trading, and more. These platforms usually work with reliable technological partners such as Amazon Web Services or Microsoft Azure to ensure that their software never experiences downtime or connectivity issues.
- Run an application locally. This is the most technically challenging and unreliable method. It is possible to install a program that will connect to your CEX platform via API and trade on your behalf. However, setting up a system that will react to the market appropriately by receiving signals from providers or TradingView while working flawlessly is quite hard.
To get started with an automation vendor, you only need to connect your margin account to the bot and allow it to trade with your assets. It is quite easy to do as every single automation platform has detailed instructions on how to set up your first bot.
Trading crypto with bot safely
Since margin trading is associated with elevated levels of risk, it is a good idea to follow some established risk management strategies when building your automated trading systems. You should be very careful when setting up a trading system for your margin account. A single error can cause significant damage to your portfolio.
Here are some tips to increase potential profitability while reducing risks:
- Do not forget about delayed orders. Stop-loss helps you prevent forfeiture of assets which is hugely important for positions at a risk of being margin called. Take profit is a great tool to set profitability goals and not overextend your reach when chasing big gains. These orders are critical for the success of your automated trading systems.
- Limit position sizes. Companies like WunderTrading allow you to choose the maximum size of any market position created by your bot. You should never allow robots to use more than a certain portion of your portfolio to make trades. Many experts believe that a single leveraged position should never exceed 1% — 2% of your total assets. You may choose a different number if you do not have a large portfolio.
- Trade assets that you understand. Doing your own research and learning about digital assets are important skills that should be applied to your trading routines. Working with an asset that you don’t fully understand is dangerous and can lead to significant financial losses.
- Test your signals. All bots are triggered by signals. These can be manual commands from users or alerts received from a provider or your technical analysis system deployed on TradingView. If you are using the latter, it is important to test everything multiple times before using in the real market. The TradingView platform has a useful instrument called “Strategy Tester” allowing you to see when alerts appear when you use your technical analysis strategy. WunderTrading has its backtesting functionality to check how your automated system performs against the market history.
These tips will help you reduce overall risks and trade carefully while trying to increase profitability. Ignoring risk management is unwise when you work with leverage. Not only profits are amplified, but the losses too.
How to choose a margin bot
Picking the right provider of automation services is highly influential for the success of your investment activities in the crypto market. You should work with automation vendors that offer the necessary level of flexibility both in terms of pricing and technology.
Here are some things that you should look for in an automation company if you want to build efficient crypto trading bots and achieve consistency:
- Versatility. You don’t want to feel stuck with only one type of trading robots. Signal bots can perform quite well if you have a good technical analysis strategy, but having an option to use other products like copy trading, DCA bots, or novel AI-assisted statistical arbitrage systems is always a good thing!
- Affordability. Gone are the days when you had to pay hundreds of thousands of dollars upfront to run an efficient automated trading system. Contemporary bots are cheap, cost-effective for end users, and do not require any upkeep on your part. Choose providers that have flexible payment plans and offer the best value for your dollar.
- Integration. If you do not want to be limited to just a couple of trading platforms, work with companies that can connect to a variety of centralized exchanges, signal providers, and terminals. Several CEX websites, multiple analytical companies, and TradingView are a good combo of integrated services that should be featured on a proper automation platform.
- Flexibility. Retail traders should be able to fine tune their bots and carefully change settings until they find the right combination of parameters to reach their profitability goals. Work with companies that allow you to set up delayed orders, choose the right position size, and adjust other settings as you see fit.
Remember that the long-term outcome of your investment activities regarding automated margin trading crypto bots is determined by your choices and actions. Make sure to choose your vendors carefully, to pick the right type of technical analysis strategy and to employ all risk management techniques known to you.