Crypto Trading Bots

28 February 12:47

[TL;DR]

Crypto trading bots enable the efficient automation of cryptocurrency investments and manage risks by creating rules for making trades. Strategies can be set up based on previous market data or chosen according to the most popular ones tested by other users online. These bots help in constantly monitoring market prices and executing all the necessities in the crypto trading space. This article, however, contains a detailed explanation of crypto trading bots. Keep reading to get more details.

What exactly are crypto trading bots?

Crypto trading bots are automated trading systems that trade on behalf of investors. They enable users to automate the execution of trades when certain conditions are met while essentially accounting for current prices and volatility levels and making investment and crypto-trading more accessible.

Bots are relatively more efficient than people as they make fewer mistakes, leaving little opportunity for sentiments or emotion. This factor makes it very useful in the cryptocurrency market due to the wild price volatility. Algorithmic trading bots, according to estimates, account for 70-80% of the total crypto trading volume. Traders utilize bots to take advantage of the global cryptocurrency markets, which are open 24/7.

Why use a crypto trading bot?

1. Ease of Use
Crypto trading bots are simple to use and do not require any programming experience. All that's needed is a list of assets to trade with the bot, your desired entry/exit conditions, and how often you want it to trade using the techniques you've specified. These automated systems can handle numerous trades simultaneously, thereby saving time for frequent traders who spend a lot of time switching between several cryptocurrency exchanges.

Crypto trading bots enable trading strategies, which saves traders the stress of constantly checking their profit margins or keeping an eye on a platform all day to see when prices change. Bots take care of everything while subsequently giving traders more free time.

2. Risk Management
Crypto trading bots allow the set up of conditions for your trades, such as canceling all other orders and stopping trading if one of them fails. This keeps traders from losing their entire account balance due to a single bad trade or a series of bad transactions. It also allows consumers who aren't interested in tracking prices every day of the year to engage in crypto markets with less risk.

Another advantage is the backtesting of strategies using historical data before investing real money, which means you can "paper trade" on a virtual exchange first without risking any money. Before investing actual money, you get to tweak these parameters until they're profitable or at least worth a shot. After completing this process, one can implement the setting on a live account to see how they perform.

3. Transparency
Most crypto trading bots are open source, allowing anyone to examine the code and learn how they operate. Crypto bots are different from some financial software, which can be challenging to decipher. Crypto trading bots have no hidden fees or mechanisms, implying that their operations are always open and viable.

Crypto trading bots strategies

1. Arbitrage
Arbitrage is an investment strategy in which an investor buys and sells an asset in separate marketplaces at the same time to profit from a price difference. Even though pricing variations are often slight and short-lived, the rewards can be impressive when multiplied by high volumes. Hedge funds and skilled Investors frequently leverage the arbitrage strategy.

The Arbitrage strategy enables profit-making by exploiting price differences. This functions when traders buy and sell on exchanges simultaneously. The price of an asset varies in different exchanges due to fragmentation in price across marketplaces, i.e., Y price can be $1.05 in Exchange A and $1.04 in Exchange B. Y will be bought and sold simultaneously on the two different exchange platforms to profit from this price difference.

2. Market making
A market-making bot is an automated investment approach that provides liquidity by filling the order book with buy and sell orders so that other market participants, buyers, and sellers, can execute their orders as needed. As a result, market makers play a unique function in the financial ecosystem by fostering market trust.

3. Copy trading
Copy-trading bots automate buying and selling of crypto assets by allowing users to copy the actual trades of professional or experienced traders.

Copy trading is also known as social or mirror trading, and it entails the mitigation of someone else's transactions or trading methods. These are usually seasoned traders who make more money than they lose. As a result, novice traders frequently copy the deals of more experienced traders. It also allows you to copy the bots of skilled traders or even signal sources. Therefore, the copier will achieve the same profit or loss as the professional traders.

4. Grid trading
Grid trading is a quantitative trading strategy that uses bots to automate spot trading buying and selling. The primary purpose of grid trading is to place market orders at ordained intervals within a specified price range. To create a trading grid, orders are put above and below a predetermined price, and as prices gradually increase or decrease.

5. Mean Reversion
The mean reversion strategy uses a simple assumption — if a coin's price deviates from its average, it will eventually return. This statement is true for both traditional and cryptocurrency markets due to market psychology in general.

6. Momentum Trading
Momentum trading is a method that aims to enter a trend while it is gaining traction by using momentum. Simply expressed, momentum refers to a price trend's inertia to continue increasing or decreasing for a set period, usually considering price and volume data.

This Trading leverages market volatility by taking short-term positions in assets that are moving up and selling them as soon as they show signs of declining. The trader then moves the capital to new positions. Sufficient momentum can continue upward or downward, confirmed by changes in trading volume and other technical factors.

Gate.io Trading Bot
Gate.io has its bots for automated crypto trading. However, you can choose to copy the bots or launch your strategies.
If a trader chooses an existing, he will have to pay 5% of their profits, but to use Gate.io internal bots, you don’t have to spend any additional funds; you only need to pay trading fees which can be lowered by using the Gate token(GT) for fee payments.

Here are some of the most frequently used Gate.io internal bots:

1. Futures Grid
2. Spot Grid
3. Smart Rebalance
4. Unlimited Grid
5. Spot-Futures Arbitrage
6. Margin Grid

Risks of using Crypto Trading bots

1. Mechanical Failures
The theory behind automated trading might seem smooth and straightforward, and in reality, it is, but that doesn't make it faultless. A trade order could be stored on a computer instead of a server in some trading platforms, which means that the trade order may not be sent to the market if the internet connection is lost. There could also be a mismatch between the strategy's "theoretical trades" and the order entry platform component that converts them into actual trades. Traders should expect a learning curve when using crypto trading bots, as they are not infallible.

2. Over Optimization
Over-optimization refers to excessive tweaking, which produces an unreliable trading strategy in live trading. Although it is feasible to tweak a strategy to achieve remarkable outcomes when evaluated on historical data, traders frequently make the mistake of assuming that a trading plan must have nearly 100 % profit or never have a downturn. This perspective lures traders over tweak trading parameters to generate a "near-perfect" strategy which eventually fails when implemented in a live market.

3. Limited cryptocurrencies
For efficient cryptocurrency trading, the cryptocurrency market has hundreds of cryptocurrencies. However, one of the risks of these crypto trading bots is that they only have access to a limited number of cryptocurrencies.

4. Unexpected decisions
Crypto trading bots are automated to work throughout the year. However, this is another risk of using crypto trading bots because they make unexpected decisions on behalf of investors, which may, in turn, result in a loss or minor profit, depending on the cryptocurrency values at that moment.

5. Time-consuming process
While the functionality of automating operations might save time, setting up the entire process of adopting crypto trading bots also takes time to properly understand how the tools can operate efficiently without any potential errors.
A crypto trading bot also requires a solid grasp of crypto trading to set and ensure effective rules and efficient running of the bot.
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6. Potential security weaknesses
Crypto trading bots use APIs to carry out trades, which allows them to work without manual inputs. Even though cybercriminals usually avoid blockchains because they are well-secured, they may easily attack trading bots or crypto exchanges. However, this risk can be reduced by keeping your API keys hidden and deactivating automatic withdrawals.

Conclusion

Cryptocurrency trading bots can save time while increasing profits over time when the user configures rules that prevent unfavourable trades. However, they should not be considered a total replacement for human trading, which still achieves the best returns in the crypto markets.

These systems are not perfect, which is why it's crucial not to invest an entire capital exclusively into one system. It's very advisable not to diversify with as many crypto bots as possible to hedge against volatility and maximise investment profits over time.

Author: Gate.io Observer: M. Olantuji
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.