You need to know how to choose the right crypto trading bot, no matter how skilled a trader you are, as there will be occasions when the crypto market will beat you. Due to its extreme volatility and 24/7 availability, it is nearly impossible to always be ahead of the curve in crypto trading. This is why I’m going to show you how to select the best crypto trading bots and lighten the burden!
Since trading bots are a reliable mainstay in traditional finance, it was only a matter of time before they gained popularity in cryptocurrency trading as well. Through API links, they operate by analyzing market data and automatically placing orders directly on the exchange, resulting in a quicker, more rational, and more efficient approach than any person could.
You may have used trading robots on a large, centralized exchange like Kraken, Bybit, or Binance in the past. But what precisely are they, and how do they function? Most importantly, among the many options available, how do you pick the crypto trading bot that’s ideal for you? This comprehensive guide has every answer!
What Exactly Are Crypto Trading Bots?
Let’s begin with the fundamentals before I teach you how to select a crypto trading robot. What exactly are trading robots?
In a nutshell, a trading bot is a computer program that employs artificial intelligence and sophisticated algorithms to automate specific procedures, such as trading in this case. The buying and selling of cryptocurrencies is one such example. Using predetermined criteria, they examine vast quantities of market data, both historical and real-time, to determine the optimum moment to execute buy or sell transactions on your behalf.
Trading itself can be just as complex and varied as crypto trading bots. They are adaptable to support a wide variety of trading strategies, including simple market-making, arbitrage, and futures trading. They are so adaptable because novices may use them to get a head start without having a thorough understanding of the industry. On the other hand, professionals welcome them as a way to manage a sizable portfolio or carry out complicated tactics.
By this point, the implications are likely obvious: due to the elimination of the human element, crypto trading bots have a significant advantage over manual trading (at least theoretically). The human factor, along with all the inefficiencies that it entails. The algorithm, unlike us, never sleeps, cannot be swayed by emotions, and responds far more quickly. It’s similar to having a personal assistant whose only job is to help you achieve your trading objectives.
Crypto trading bots can connect to centralized exchanges through APIs (Application Programming Interfaces). They may also engage with the blockchain directly using smart contract calls, as is the situation with trading bots on decentralized exchanges.
How Do They Function?
The following is a general outline of how bots operate, though the details vary according to their function and design:
- Data Analysis: To find trends and patterns, the bot gathers and analyzes historical and real-time market data indicators.
- Signal generation: The bot generates a signal indicating whether the conditions for a buy or sell order have been met.
- Risk distribution: The bot allows you to specify the risk preferences it will take into consideration, such as the maximum percentage of your portfolio that you are ready to risk, assign to a single trade, or establish take-profit goals.
- Execution: The bot automatically places orders in accordance with the pre-established regulations after the signal has been generated and the risk preferences have been established.
Different Kinds of Cryptocurrency Trading Bots
You will soon learn that there are several types of crypto trading bots, each with its own functions and use, as you investigate how to select one. These are the most prevalent kinds you will see:
Arbitrage Bot
This kind of bot takes advantage of price differences between various exchanges and use them to your benefit. It automatically executes buy and sell orders in order to profit from the price differential while simultaneously monitoring several exchanges.
As an example, consider that Bitcoin is trading for $94,950.69 on Binance and $95,065.00 on Bybit. These rates are subject to change at any moment. Rather than attempting to monitor these fluctuations manually, you might configure an arbitrage robot to do so for you. It recognizes a sell order opportunity on Bybit and a buy order opportunity on Binance in this scenario.
Market Making Bot
The actions of this bot are precisely as advertised. Without the market for it, there is no crypto trading. As a result, this cryptocurrency trading bot makes buy and sell orders at many price levels at the same time, ensuring high liquidity.
In this instance, the profit comes from the bid-ask spread, which is the difference between the maximum price a buyer is prepared to pay for anything and the lowest price a seller is prepared to accept for it. The lowest price a seller is willing to accept (the ask) and a valuable asset. Users have the option of adjusting the bid-ask spread of the bot to be tighter or wider; a tighter spread wins more deals, but each transaction yields lesser gains.
Copy Trading Bot
In copy trading, one trader replicates all of the transactions of a more seasoned trader in order to learn from their methods. It’s similar to attempting to replicate the actions of your own role model in order to reach the same position as them.
Grids Trading Bot
The grid trading approach places a sequence of buy and sell orders at gradually rising and falling values, which is implemented by this bot, and maintains value levels within the expected price range.
The system automatically sells at higher prices and buys at lower ones in order to profit from slight changes as market values change throughout this grid. When values fluctuate within a predictable range, this approach works especially well in sideways markets.
By introducing leverage into the mix, that is, by utilizing leveraged grid bots that implement this approach, experienced traders may take it a step further. Borrowing money to expand their position size and thereby boost their earnings.
Dollar-Cost Averaging (DCA) Bot
Additionally, the DCA bot aids in automating the well-known cryptocurrency trading technique of the same name. The recommendation to regularly invest in cryptocurrency to avoid investing big sums during the most volatile times is likely something you’ve heard. The DCA bot may be able to help if you only occasionally trade cryptocurrencies and don’t want it to become a chore. a lot of trouble and time.
Just choose the asset you wish to trade, the amount of money you want to invest, and the frequency with which you want to do so (for example, $50 per week). The bot handles the remainder, which is a good supplement for risk-averse traders who are committed to the long term. However, remember that higher cumulative trading costs may result from frequent small purchases.
Portfolio Automation Bot
Optimizing portfolios is one of the most difficult challenges that traders with high-powered capabilities encounter. It’s more difficult to keep track of all your various assets so you can make wise purchases and sales to maximize your profits.
Portfolio automation bots, also known as portfolio rebalancing bots, assist users in keeping the proportion of cryptocurrencies in their portfolio at its ideal level. For instance, the program will automatically sell a portion of the coin if its value rises and surpasses the others, then reinvest in the ones that are underperforming. You can configure your own predetermined rules, just like with other kinds of bots.
Mean Reversion Bot
Despite the volatility of the cryptocurrency industry, some analysts think that it still has a propensity for a kind of homeostasis, where prices tend to return to equilibrium. their historical average over time, which mitigates both the highs and lows.
This concept is used by the mean reversion bot, which makes trades when prices deviate too much from the average in either direction, in order to maintain the average price steady. The program maintains track of the charts and computes the historical average price of the asset over a given time period, such as the previous 20 days or 50 hours.
The robot will sell the asset if the price is too high relative to the average, anticipating a drop in price. Similarly, if the price is too low in comparison to the average, it will execute a buy order.
Do Crypto Trading Bots Pay Off?
The next thing you’ll have after getting familiar with all the various types of crypto trading robots as the first step in selecting one isThe first step is to determine whether you truly need one. Is there anything negative about utilizing such software, and does the bad outweigh the good? Let’s hear both sides of the tale.
Advantages of Crypto Trading Bot
I’ve already discussed a few of the reasons why you may want to think about automating your cryptocurrency trading experience, but allow me to go further into them. Let’s explore the benefits. If you’re unsure whether or not to master the art of selecting a cryptocurrency trading bot, here’s what’s in it for you:
- Speed and Accuracy: When it comes to these two essential criteria, even the most skilled traders are no match for robots. The speed at which trading robots can complete trades in milliseconds, which is faster than the time it takes the average person to even click a button, let alone decide!
- Efficiency: Crypto trading bots can manage hundreds of assets at once across numerous exchange platforms, something that would be nearly impossible to maintain unless cryptocurrency trading were your full-time occupation. Additionally, their scalability is higher than that of manual trading.
- Avoiding Emotional Trading: FOMO is one of the frequent challenges, and none of us is immune to prejudice and illogical decision. Based on algorithms rather than emotional urges, trading bots follow a set of predetermined guidelines and strategies.
- Lowering Human Mistakes: Every transaction is at risk of failing because of a single typo or misclick, even if you are able to stay calm. These errors are reduced or eliminated by automation.
- 24/7 Trading: The crypto market never sleeps, nor do the robots! Thousands of trades may be executed by a trading bot at any hour of the day.
As you can see, there is a lot to like about crypto trading bots! Their advantages apply to all facets of cryptocurrency trading at all skill levels.
Cons
Any tutorial on selecting a cryptocurrency trading bot must also highlight the drawbacks. Despite all the claims, Trading bots aren’t always everything they’re made out to be.
- Complex setup: It might be difficult for novice traders to set up a crypto trading bot since there are so many variables to consider. Additionally, a comprehensive knowledge of trading tactics and technical indicators is necessary.
- Prices: Many of the well-known trading robots are subscription-based or charge a one-time fee, even though some are free. You may have to pay for a cloud server if the bot operates around the clock. Lastly, bots have a tendency to engage in a lot of trading, which can result in transaction costs on the exchange.
- Potential for fraud: Bots are at risk of being hacked when they have access to your exchange account. Furthermore, certain bots are purposely created to defraud users or make transactions that benefit their creators.
Now that you’ve seen both sides of the argument, you’ll be able to get a better sense of what to anticipate from your path of learning how to select a cryptocurrency trading bot.
How to Choose a Crypto Trading Bot in 10 Steps
Time to get to the practical part of this guide if you’ve determined that automating your crypto trading experience is worthwhile after all! Here, I’ll outline how to select a crypto trading bot in a series of steps, covering all the essential things to think about.
1. Determine Your Trading Objectives
Knowing exactly what you want to accomplish is the first step in selecting a cryptocurrency trading bot. The following are some questions you should ask yourself:
- Are you trying to automate boring tasks, reduce risks, or increase profits?
- Which cryptocurrencies do you trade?
- Are you seeking long-term investment growth, or do you prefer making quick, short-term trades?
Are you a newcomer to the world of cryptocurrency trading, seeking a way to get ahead, or are you an experienced trader? longtime enthusiast who requires automation to assist with managing a big portfolio or implementing more complicated tactics?
Knowing your goals will help you choose the appropriate course of action, the appropriate bot type, and the quantity of time and money you’re willing to spend. Be prepared to invest in this project.
2. Make a Decision on Pricing
There are several types of crypto trading bots available, ranging in price from free, open-source versions to high-end ones that need monthly or yearly subscriptions. Fees for cloud hosting or exchange usage are just some of the hidden expenses to take into account.
Review your budget and think about your requirements. You probably shouldn’t invest a fortune in your first trading bot if you’re a newbie who’s never used one before, only to understand that it’s not a good fit for you. It may be harder to locate a free crypto trading bot, but there are still lots of possibilities out there.
A more expensive software may provide superior functionality, security, and dependable support if you can afford it. Nevertheless, price is not always a trustworthy indicator of quality. Read the reviews before making a decision.
3. Verify Exchange Compatibility
Make sure the bots you’re considering are compatible with your preferred cryptocurrency exchange, if you don’t want to switch. Bybit, Binance, and Kraken are a few of the most well-known exchanges that offer both third-party integrations and integrated trading robots.
4. Acknowledge How Simple It Is to Use
It’s wise to give priority to trading bots that are easy to use, regardless of whether you’re looking into how to select one for novice or experienced traders. It’s difficult enough to set up a system to meet your tactics and requirements without also having to cope with an unintuitive platform.
Seek for bots that are easy to set up, have user-friendly dashboards, and have customer service that is easily accessible. If you are an experienced trader, see whether the software you are thinking about purchasing has enough customization capabilities that are simple to use and change.
5. Do Some Study About the Bot’s Performance
Knowing how to select a cryptocurrency trading bot is essential since the industry is full of hyperbole and false claims. through those assertions made in marketing, and identify the most useful tools. You’ll need to do your own study at this point! Look at online reviews, user reviews, and community feedback to verify consistent and dependable performance. Statistics, case studies, or backtesting outcomes are frequently provided by reputable bots.
6. Examine the Bot’s Security
This is the only thing you should never give in to. Check to see if the bot has basic security features, such as two-factor authentication (2FA), to safeguard your money and personal information. I would advise using platforms that let you retain control over your private keys and only engage with exchanges using read-only APIs for the greatest security.
Similar to the prior step, avoid robots that have a history of security breaches or questionable behavior, and don’t underestimate the influence of reviews and comments.
7. Determine if The Bot Provides Backtesting and Simulation Capabilities.
Look for bots that use both backtesting and paper trading. In the former, a trading approach is assessed using historical market data to see how it would have performed in the past, and in the latter, the strategy is evaluated using real-time market information. Before making real-time transactions, it uses live data to replicate them.
8. Experiment Using Tiny Amounts
You have now finished the first seven steps and obtained your new trading robot, so it is time to test it out! To determine how the program will handle a modest investment, begin by making one. Keep an eye on it and don’t hesitate to make changes to your plan and parameters as needed.
You can trust the bot with greater amounts once you have gained confidence and learned the ropes. In the early stages, the gradual method will help you avoid burnout and minimize financial losses.
9. Have Reasonable Expectations
During the honeymoon period, attempt to maintain your composure! Keep your expectations in check at all times. Although trading robots may be an extremely useful resource for maximizing your cryptocurrency, they are neither a cash-generating device nor a magical protection against macroeconomic variables such as erratic market fluctuation.
10. Maintain an Awareness of Market Trends
Selecting a cryptocurrency trading bot is not a one-time job; it’s an ongoing process. In two or five years, don’t become complacent and believe that your initial application will continue to be the best option.
Make it a practice to routinely reassess your goals and requirements, and stay current with the most recent advances so that you can make informed decisions. When your next bot comes your way, you don’t miss out on it.
Conclusion
I sincerely hope that my article on how to select a crypto trading bot was helpful enough to persuade you. You may use this checklist as a roadmap until you develop, even if the procedure is not as straightforward as it may appear. Do trial and error to discover your own workflow.
In short, crypto trading bots are programs that process large volumes of market data and make trading decisions automatically, thereby automating the trading process, choices made in accordance with the criteria you established and the trading methods they are intended to support. You can use these apps to keep an eye on the market around the clock and manage your portfolio successfully.
