Cryptocurrency trading robots have the potential to be the next great revolution in Blockchain-based passive income. Through cutting edge ML-backed algorithms, they confer considerable benefits to those who knowhow to use them correctly. This being said, the window for entering this space while the profits are still competitive is quickly closing. In this post we have put together all the basics of crypto trading bots to give you all the information you need on which bots are the unrivalled best bots for crypto trading, how to set them up, and how to make them work for you.
What is a Cryptotrading bot?
With the Blockchain ecosystem being so tech-heavy and the presence of several leading engineers in the space, it was probably inevitable that AI, ML and Blockchain tech would converge in some way. AI-based crypto trading bots represent the most obvious but most lucrative use-case for this synergy.
A crypto trading bot is a software program that automatically buys and/or sells assets when their price reaches a certain limit. Cryptocurrency trading robots use the APIs of the exchanges to merge and get all the necessary information and place an order on your behalf. Cryptobots often analyze market data such as volume, price, orders, time, and other vital factors that need to be considered when trading. However, if you want your trading bot to pay more attention to other things, you can easily set your own preferences.
Trading robots are not a prerogative of the cryptocurrency world. They are also used in the stock market for the same purpose: to help traders increase their initial investment. The internet is full of tutorials on how to build a perfect stock trading bot and use it on NYSE, NASDAQ and other stock exchanges.
How do trading bots work?
As mentioned above, trading robots need to interact with cryptocurrency exchanges to obtain essential data and follow a certain algorithm of actions. Virtually all cryptocurrency exchanges provide their API for algorithm trading. Sometimes the exchange also has tutorials on how to set up a trading robot. Most trading robots work on a fairly simple principle that can be described as “signal generator – risk allocation – execution”.
That’s the pattern behind every decision these bots make.
The signal generator is the part where a bot makes its predictions. The data (whether collected from indicators or other sources) enters the generator and it decides whether to send a buy or sell signal. Subsequently, this signal proceeds for risk allocation.
Once the buy or sell signal is there, a cryptocurrency trading bot has to decide how much to buy or sell. It decides whether to allocate all the capital to the trade, or just a part, and so on.
The final part of the negotiation is executed, the part in which the operation actually occurs. With all the processes checked and decided, concluding such an agreement is a simple task. Although it may seem that this is the least important part, it is not. If other traders use the same algorithms to place their trades, you may get an unfavorable deal at a lower price.
This part of the algorithm decides the best way to carry out the deal itself, whether buying/selling in one piece will bring higher profits or not. So, to make sure your trading bot works in your best interest, you’ll need one to excel at all three parts of trading.
Pay close attention to the fact that a cryptocurrency trading bot requires access to your public and private API key. This necessity causes cryptocurrency exchanges to believe that you authorize a trading bot to act on your behalf.
Why use a trading bot?
When looking into this, the most obvious question that can arise is “why would I need to use a trading bot if I can do it myself?”. Let’s face the fact that, at the end of the day, time is the most valuable resource for any serious investor. Time is money and a trading bot demonstrates this perfectly. Beyond this, it has several important advantages over humans.
- We have limitations that bots simply don’t have. We cannot monitor the market 24/7, and even if the trader sets up an intricate network of alerts, he would not be able to react to them immediately. Bots do not need to sleep, eat and are not distracted.
- Trading bots can also react faster than any human, and every moment can cost the trader money.
- The cryptocurrency trading robot can easily process more data than any human. You can analyze and predict how the market would change before a trade, giving you an edge and a profit.
- Cryptocurrency trading robots will not only give you free time, but also give you the opportunity to do more efficient arbitrage trading.
- We tend to get lost in emotion, whether that emotion be greed for more high risk high reward trades or fear of steep losses. This can lead to even more losses as the trader executes some unwise decisions in the heat of the moment. A trading bot has no such weakness as it operates on cold logic and does what is most profitable according to statistics. This means that the bots will lose less frequently and generate more profit overall.
There are different reasons why humans can outperform trading bots in similar situations, as taking higher risks can result in a higher payout, or a hunch can allow one to guess the trend. This being said, Bots are more effective at making money than humans, and that alone should be reason enough to employ them.
How to create a trading bot?
Buying a trading robot is not the only option. If nothing on the market appeals to you, you can always try to create your own trading bot that meets all your preferences and market foci. Some technical expertise, as well as knowledge of trading and market trends, would be required to create a truly efficient one.
To code a trading robot yourself, you will need to:
- Conduct research: what do you want from your bot? What is your main objective? What platform would you use? Answer those questions, create your own risk profile based on your capital and time constraints. Once you’ve created it, you can start coding.
- Base Coding – A trading bot is only as good as its code. It can’t really go outside of what it was programmed to do, so you should carefully consider what you need it to do and what tools to include. The most common are setting entry and exit rules and the number of units to sell/buy.
- Data Cleaning – To get accurate readings during your tests, you need to make sure you have accurate data. Cleaning and compiling the data so that the information collected is as close to actual trading as possible is vital.
- Test – Unless you have thoroughly tested your bot, you cannot say that it actually works. You need to make sure you catch small bugs and issues that can cost you money before using it for trading. Of course, you can’t catch them all, but the more you get before you set it up, the less trouble you’ll have later.
- Design – With the code done and tested, you need to make sure that your bot design takes risks and market failures into account.
With all of that taken care of, you need to make sure that your bot uses viable trading strategies. You can do this by programming it to create robust statistical models, from which such strategies would be built. This will allow your bot to follow the guidelines and execute commands at the right time.
We have tried to answer the most common questions an enterprising investor might have such as what trading robots are, why traders should use them, and how to create and configure one for yourself. The cryptocurrency market is one of the markets that benefits the most from bot trading, as most cryptocurrencies are really volatile assets which scales very well with data-driven ML-algorithms. In this way, operators should make quick decisions. Even a second or two late can spell disaster for your investment. Trading robots are much colder operators, so they can make your trades more profitable overall, for the price of making a little less money per trade. As many experienced traders would say, a consistent minor profit is much better than any loss. Stay tuned for more information on trading and cryptocurrencies.