- A trading bot consists of a program that automatically executes transactions on a crypto exchange according to a series of parameters defined by the programmer or by the user himself.
- A trading bot will execute the purchase of an asset when the Relative Strength Index (RSI), a technical analysis indicator, is low and will sell the asset when the RSI is high.
Usually when thinking about cryptocurrencies, some people associate them with trading. However, it is essential to understand that this activity is one of the many ways that exist to participate in the cryptocurrency market, although trading remains one of the most relevant.
The crypto world, being a market that works 24/7, is almost impossible to keep up with, that is why tools have been developed to help traders manage their trading orders more efficiently, as is the case with .crypto trading bots.
What is trading?
Before exploring what trading bots consist of, it is essential to understand the fundamentals of the activity, that is, of the trading.
It consists of the purchase – sale of listed assets with a lot of market liquidity, that is, it applies to stocks, currencies, commodities, derivatives, futures and, of course, cryptocurrencies. A close translation to Spanish of the term “trading” is “comercio”.
Like the rest of financial actions, its objective is to obtain an economic benefit from the operation.
Trading is fundamentally a speculative activity, that is, it seeks to take advantage of market price volatility to obtain capital gains. It is a high-risk activity where traders, or merchants, bet that market movements favor them. The question is: How do you get a capital gain? We will see later.
In a simplified way it is: buy low and sell high; or, conversely, selling an asset betting on buying it cheaper.
There are different types of trading: day trading, scalping, swing trading, trend or directional trading and social trading. Essentially, each type of trading differs from the other by the strategy that is applied to obtain profits.
Basic concepts
- What is an API? It is the interface for an application that allows sending and receiving specific types of information. That is, it is a set of definitions and protocols that are used to develop and integrate two software applications, allowing communication between them.
- What is a cryptocurrency pair? It is a measure used in trading to represent the value of a given asset relative to another. For example, the BTC/USDT pair determines the value of Bitcoin relative to the value of USDT. And, consequently, it is an indicator of when an asset is being appreciated or devalued.
- What is an investment? It consists of assigning a certain amount of capital to an asset with the expectation of generating a profit, generally in the long term.
- trading vs. Invest. The essential goal behind trading and investing is essentially the same: To make a profit in the markets. However, the strategy to achieve this is fundamentally different. Investors are typically looking to earn a return over a longer period of time. While traders seek to take advantage of the current volatility of the market to make profits. That is, they enter and exit their positions much more frequently. Which of the strategies is better? That is for each individual person to decide based on their financial goals and their own personality, ie risk aversion or not.
- What is fundamental analysis? It consists of a method to calculate the valuation of an asset. Both financial and economic factors are considered in determining the true value of an asset. It seeks to determine if the asset is undervalued or overvalued, based on said decision a trader can decide to position himself or not in a pair of cryptocurrencies.
- What is technical analysis? The analysis strategy underlies the study of the historical movement of the price action seeking to approximate what the next price movement will be based on what the analysis finds. Different indicators are used such as volume, chart patterns and other tools.
What is a trading bot?
A trading bot consists of a program that automatically executes transactions on a crypto exchange according to a series of parameters defined by the programmer or by the user himself..
Basically, an API is created that allows communication between the bot and the crypto exchange, so that buy and sell orders can be made by the user automatically. Hence a trading bot will execute the purchase of an asset when the Relative Strength Index (RSI), a technical analysis indicator, is low and will sell the asset when the RSI is high.
To some extent they are a tool that facilitates some aspects of trading. Bots automate the analysis and interpretation of market statistics. They collect market data, interpret it, calculate risk and execute buy/sell. However, as always, nothing is perfect.
How do they work?
Crypto trading bots need to have access to both the cryptocurrency wallet and the crypto exchange you want to trade on. Consequently, you need to bind the bot to the platform via your API key, that way the bot and the exchange will start communicating.
Regarding how they make decisions, the bots have a series of programs that analyze the performance of the market and the risk, based on this, it will execute the operations that it considers to be low risk, unless, within its programming, it is requested consider high-risk operations.
In this way, they work in three stages essentially:
- Signal generator: Here the work that the trader or merchant should do is done, that is, studying the behavior of the market, making predictions and identifying possible operations.
- Risk Allocation: The bot will seek to distribute risk based on a specific set of parameters and rules that were set by its developers or by the trader himself. These parameters establish how and to what extent capital will be allocated when trading depending on risk.
- Lastly, the stage where cryptocurrencies are bought and sold based on the signals generated by the preconfigured trading system.
types of bots
There is a wide variety of cryptocurrency bots, two of the most important are:
- Arbitration Bots: They are the most common and are basically based on the existence of price differentials for the same asset in different crypto exchanges. These types of bots observe the prices of the same assets on various crypto exchanges and trade with each other in search of profit. Certainly, the price divergences are not that big, however, by doing this type of operation several times, profits can be generated, but for this, a certain speed in the processing of transactions is required.
- trending bots: Based on the behavior of the market, bots of this type buy and sell when, in theory, it is optimal, for this, they use mathematical and market data and, therefore, they can make mistakes.
Advantages
- Efficiency: As long as the bot works properly, receives the correct data, and has the right algorithms, cryptocurrency trading can be more efficient using them, especially since they can run 24/7. In addition, they manage to process more information at the same time than the human mind.
- Emotionless: One of the most important elements in traders is to eliminate emotions when it comes to establishing a strategy. Bots make decisions based on data, they do not take into account greed or fear of loss. However, it is also true that professional traders already manage their emotions, so this advantage is especially for beginners.
Disadvantages
- Volatility: The situation of the crypto market is highly dynamic and, therefore, it is practically impossible to perfectly program the bots so that they always act as they should in a trade.
- They do not give massive profits: Yes, trading bots offer a chance to make a profit. However, they are not used for massive profits.
- Requires in-depth knowledge of the crypto market. As well as an excellent support investment plan.
Are they profitable?
They are not inherently profitable and this is essential for any trader considering using a crypto trading bot to keep in mind. The success of a bot can depend on various factors such as:
- The accuracy of the software. This applies to the bot, the API, and the exchange itself.
- market factors. Cryptocurrencies are highly volatile so the price situation can change quickly. So if a market drops or spikes or you are trading in a small market with little liquidity, bad trades can be made.
- The quality of the strategy. The bot does not set the strategy itself. The developer or user must indicate to the bot the strategy that it will follow.
- The adjustment of the bot for different market conditions. Trading strategies in the cryptocurrency market are not standard and do not always work under different market conditions.
So yes, crypto trading bots are a help. However, they do not guarantee profits and they also do not guarantee that the trader will not experience losses. Also, while it is an interesting and time-consuming tool, it does not mean that a trader will start using a trading bot and forget about it. The trader must monitor the behavior of the trading bot in order to make profits and reduce losses.
final thoughts
Crypto trading bots are not perfect and do not offer any kind of guarantee. They are just a tool that can help a trader trade better once they have programmed the bot to work properly.
Therefore, if a person decides to start using this type of tool, they must ensure that:
- Choose a reliable trading bot. See the opinion of the experts. Review in detail who developed it and how they did it.
- Never invest more than you are willing to lose.
- Check that the bot settings meet your individual risk preferences.
- Study the behavior of the market and determine the strategy that the bot should follow.
- Monitor the behavior of the bot.
- Be aware that even by following all of these tips, you can still lose money.
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