The people who deal with financial market and trading activities everyday are aware of the volatile and fluctuating nature of the market. The opportunities in the financial market to earn profit never wait for anyone. It is considered important to be vigilant all the time and keep an eye on the changing market situations.
The key to success in the crypto market is to decide every move with the changes occurring in the market. With the advancement in technology almost all the trading processes have been automated with time. These automated processes may include executing the orders, trend prediction or analysis of market.
This results in providing more time to the traders to be productive and also provide them the strategy to plan and implement better strategies in order to gain maximum profit in the market. However, a number of advanced techniques and tools available, different types of cryptocurrencies and very less applicable trading strategies have created a perplexed situation among the traders.
Automated crypto trading has also created a number of misconceptions and confusions in the minds of the investors. Even people consider it to be a scam, and some are of the view that it is some kind of black magic. Here is a detailed guide article that will explain the working and applications of automated crypto trading.
What Is Automated Crypto Trading?
When crypto programs known as crypto trading bots are used to sell and buy on the behalf of some other person, it is known as automated cryptocurrency trading or automated crypto trading. For the purpose of not missing any opportunity and in order to trade at the optimum moment, these software applications react to the changing market trends accordingly.
In addition to carrying out the trade of cryptocurrencies manually, it also helps in eliminating the factor of emotions and uncertainty from trading. Majority of the automated crypto trading platforms are application programming interfaces (APIs), however now smart contracts are utilized by the new crypto bots that can easily operate over the blockchain.
Using the API, the user can directly integrate his account with the crypto exchange. This helps them in the opening and closing of the positions on the behalf of the user according to the conditions that have been determined before time.
As the bots are computer programs, unlike humans they can work continuously without any break. Therefore, a number of such factors provide the automated crypto trading and edge over the manual trading. The bots always focus to the main aim and goal without being influenced by any emotions and as soon as any event or new market trend emerges in the market, they turn their focus towards it.
Types of Crypto Trading Bots
- Arbitrage Bots
They use arbitrage trading as the name already indicates. Using these bots, the capital can be earned when on different exchanges, the market price fluctuates between two different assets. this helps the traders in earning profit in smaller but consistent portions.
- Grid Trading Bots
These bots operate by using the volatility of the market in the advantage of the traders. The main aim of these bots is to buy low and sell high by considering the volatility and fluctuations in the market. In order to earn profit, one can buy and sell orders within the set price range by using these bots.
Common Features of Trading Bots
Automated trading bots are now used by most of the investors as they are the reliable tools to optimize the trade activity. These bots can be accessed by anyone using the hardware devices such as computers or phones. Some of the common features of the trading bots are as under.
- Risk Prediction
It obtains the raw data from market and calculate the risk factor involved in crypto trading. Moreover, it also provides recommendations to the traders that if it is the suitable time to trade or not.
- Automated Trading
The automated trading systems use the API to execute the trade processes. They calculate the risk on behalf of the traders and also advice them if it is the right time to carry out the trade or not.
How Does Automated Crypto Trading Work?
There are four steps that are required to carry out automated crypto trading in general. These are mentioned below.
- Data Analysis
Data analysis is an important step for functioning of automated crypto trading as an important factor to gain success is data in the technology-oriented world. Mining tasks can be performed at a better speed than carried out by humans by using the softwares that are machine learning enabled.
- Signal Generation
After the data analysis, the work of the traders is done by the bot that helps in the prediction of market trends. Moreover, by analyzing the market data and the technical analysis indicators, it also helps in the identification of all the trades that are possible.
- Risk Allocation
This is the step where the bot has to distribute the risk factor between the different investments made. This distribution is based on the parameters that have been determined by the trader in the past and that could eb easily determined. This step helps in making the decision of investment of the capital that how and where it would be invested and also determines the percentage of expenditure.
Execution is the step during which, as a result of the signals that are generated beforehand, the trader can sell and purchase cryptocurrency. Using the corresponding API, the buy and sell orders are passed to the exchange that are generated by the signals during this period of time.
Is Automated Crypto Trading Profitable?
A number of people are not aware of the fact that manual trading is not very popular among the masses. The reality is that most of the financial activities have now been dominated by the trading bots operated through algorithms. Almost all of the activity on the Wall Street is now driven by the algorithms.
Now a days, bots are not only used to trade crypto rather but almost everything now a days is sold and purchased using algorithmic bots such as foreign exchange, bonds or equities etc. as bots make the decisions at a faster speed than the humans, it is one of the main reason for this shift. Moreover, in the difficult situations, bots are not driven by emotions rather they focus on the main goals even in the volatile market conditions.
However, one should be aware of the fact that the risk factor cannot be completely eliminated by using the crypto trading bots. The beginners and professionals both can get the advantage and earn profit by automating their trading procedure. It is important to have the basic understanding of the market tools and rules that are integrate with trading in order to compose a bot properly.
Cost of a Crypto Trading Bot
The cost of a trading bot depends on the functions and features that one is looking for. It will decide the cost of a trading bot. There are some bots used for crypto trading that are free of cost totally while some of the bots a few dollars that have to be paid every month.
Is Automated Crypto Trading Legal?
In any domain where cryptocurrency is not allowed, the trading bots can still be legally utilized there. The trading bots are commonly used and regulated in the traditional markets now a days. Similar to the crypto trade, a huge number of stock trades is now executed by the machines. The trades can be executed easily by using the bots without the interference of any human activity that also ensures that the laws are followed the properly.
However, there are certain limitations attached to every process occurring. There is a possibility that some kind of shady tactics will be used by some of the bots and some of the bots may also come out to be a scam or a fraud. Consulting any broker that is not regulated and do not provide services to the customers after taking their required fee or the pump and dump schemes are some of them.
The efficiency of the bot is dependent on the conditions in which they can work instead of how much they can work. There are a number of factors that decide their impact. These factors may include the experience and expertise of the user, the bot being used and the platform where all these activities are carried out.
Advantages of Automated Crypto Trading
Using the automated crypto trading, the traders can enjoy a number of benefits. Some of them are mentioned below.
- Provides Discipline
Sometimes in difficult market conditions or when the market is too favorable, the traders end up in making emotional and quick decision that may end up in great losses. However, if the traders adhere to the market rules and principles, they can earn profit even in volatile market. By following the trading strategy, many major reading mistakes can be avoided by the traders such as making trades without making a proper plan beforehand or chasing the losses.
- Diversifies Trade Process
A number of different strategies and trading accounts can be used simultaneously by using the automated trading bots. This diversifies the portfolio of the traders and help them decrease the chances of loss by investing in a large number of assets.
The algorithmic programs in the computers can solve the problems and tasks in a minimal time that could never be done by any human. One can get the benefit out of every possible opportunity that arises in the market by using these bots.
- Improves Data Entry Speed
The trades can be executed at much faster rates using the automated trading bots. They can be used to monitor the market conditions every time and then act as soon as a possibility to earn profit arises. As crypto market is known for its high volatility, while trading with any currency such as Bitcoin, exiting the market even seconds before some high rates may cause a considerable impact on the trade.
- Back Testing
In order to determine the expectancy of any system and to carry out any experiment with the trade ideas, the method that is used is known as Back Testing. This method can also be applied to calculate the chances of loss and gain for any risk taken by the investor.
In case one wants to generate the same results as in the past, the back testing method can be applied on the automated trading systems. Before applying the strategy in the market, back testing may help the traders to improve and refine the trading process. One should design such an automated trading system with no flexible rules and regulations that can be biased in the favor of some one later.
One needs to provide proper direct instructions to the computer about how to operate as it cannot make any assumptions on its own. The past data can be utilized by the investors to test the instructions that are to be provided to the computer.
- Eliminates Emotions
The automated trading systems carry out the trade once the parameters set by the instructor are met without any influence of emotions. This helps the traders not to bring any doubt in the market after the bots have been instructed and they do not hesitate while looking for the results.
Not only the casual traders be benefited rather the traders who never miss any market opportunity for gaining profit can also get advantage by using automated trading bots.
Disadvantages of Automated Crypto Trading
Though there are multiple advantages attached to using the automated trading bots, however there are certain risks that one has to take care of. Some of the disadvantages of the trading bot systems are mentioned below.
- High Initial Cost
It requires both time and skills in order to set up the automated trading system from scratch. One should be aware of the fact that it may require high expenses initially that may not be recovered in some situations by the machine operations.
Moreover, in order to keep it running properly, the owner may have to pay the operational costs that may include virtual private server (VPS) services or hosting.
- Lacks Flexibility
The main issue with automated trading systems is that they are rigid and cannot adapt to the situations in the market sometimes. They are made to follow certain rules that are designed initially. As a result, one may miss certain market opportunities.
- Mechanical Failure
Sometimes there may occur some technical problems in the automated crypto trading machinery just like any other machine in the world. These problems may include data feed errors, power outages or network outages etc.
These problems may cause the machine to place an order at a wrong time when situation is not suitable and at an incorrect price that may result in loss for the traders.
- High Maintenance Cost
Setting up a machinery system comes with the maintenance cost. It is very important to monitor the automated trading systems at a regular basis in order to find if it is working fine. The unpredictable market events, software upgrades or network outages are some of the problems that may be faced while operating the machines.
These technical issues may result in slowing the trade process. Moreover, getting them fixed may also cost high charges and may result in decrease in the profit percentage.
Can Automated Crypto Trading Be Considered Safe?
There are a number of factors that decide the safety of the automated trading systems. The design of the system and if the system is monitored by the owner regularly are some of them. However, trading while using the automated bots does not mean that one just has to provide the instructions to the computer and sit back and watch the trade activity.
One cannot leave it upon the system to deal with the spare traders and with the volatility of the market. Using the reliable automated bots, the crypto trading processes can be made easier, and they can also optimize the trading process and allow continuous trading process 24 hours a day during all days of the week.
However, there is no chance of human interference that also reduces the chances of human error that may be as a result of emotions. It is always advised to carry out a thorough and detailed research before investing in any kind of trade in order to clear all the prior doubts. Or the otherwise approach may end up in loss.
In the highly volatile crypto markets, there are possibilities that the investors may miss out multiple opportunities. The automated crypto trading systems provide a great help to the traders by keeping a constant eye over the trading activity in the market. It assists the traders in taking the decisions in the right direction and helping them gain profit in the nest possible manner.
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