Cryptocurrency trading is a booming industry. With the advent of digital currencies, there are now more and more ways to trade these assets online. Naturally, this leads to some people preferring automated trading bots over human traders.
In this article you will learn about the advantages of using automated trading in cryptocurrency, as well as how it has become popular because of its efficiency and profitability!
But before we proceed, we suggest you check our recent article “10 Things You Need to Know About Cryptocurrency Before Investing”.
What is trading?
First, we need to know what trading in financial markets is and what it means.
Trading is the process of buying and selling assets, goods or services to make a profit.
If you trade stocks for example, this usually means that you buy a stock at one price (per unit) and sell it again at another price. The difference between those two prices is your trading margin.
If the value of what you bought (your asset) increased significantly while being in your possession, then when the time comes to sell, it’s possible that there will be an even greater difference between the individual purchase cost and what you can actually get out of the sale – which increases your potential profits.
For example: if I purchased 1000 shares of company XYZ for $1000 ($1/share) in January, and the next month those shares have increased in value to $2, those same assets from a month ago are now worth $2000.
Should I sell these, I’ll get back my initial investment ($1000) + a profit of $1000.
The inverse can also be true and the value of a share could’ve gone down to $.50/share.
Whether you’re buying or selling stocks, futures, or cryptocurrencies, being ‘in the game’ is trading.
How Human Traders Have & Are Trading
Traders have many responsibilities that range from analyzing potential investments to executing trades and monitoring associated risks.
Usually, a human broker has some criteria to follow from their employer that then greenlights a particular trade.
But in an age where most of us have heard of AI, Machine/Deep Learning and bots, humans can start stepping out of the way and let a machine make 100% rational, causal, and logical trade decisions.
How Human Traders Have & Are Trading
These automated trading bots are different because they are programmed to make trades based on certain criteria that could include a trading strategy or set of rules.
Speed & Accuracy
They can execute trades automatically with speed and accuracy, while minimizing human error. A lot more work is being put into the construction of these bots so they’re able to react appropriately when prices fluctuate in markets like cryptocurrency.
Efficiency
If your bot isn’t making any mistakes, it will be executing orders faster than humans could. This means less time spent watching charts for opportunities- instead you’ll have more free time to do other things!
Diversification
Another key benefit is diversification – every automated bot must own different assets from one another because they don’t base their decisions off each others’ actions, which increases the overall safety of the portfolio.
No Breaks or Downtime – Unless The Internet Dies
In addition, because these bots are constantly monitoring markets and executing trades with no breaks or downtime, this ensures they will never miss an opportunity to buy/sell a coin at its most advantageous price point.
Unemotional
Another upside is that bots never get emotional – they have a clear and consistent strategy due to the code put in place by their programmer.
Downsides
A major downside is that some traders worry about their accounts being hacked, but bot programmers work tirelessly to make sure that doesn’t happen–and it’s worth noting that you can usually set up your trading account so only YOU have access!
One other disadvantage could be latency- if your computer has a slow internet connection (or limited processing power), then automated trading may not be for you since there’s often delays in data feeds coming from exchanges like Coinbase into software packages on your device.
Different Trade Strategies an Automated Trading Bot Could Do For You
Your bot can be programmed with various trade strategies like
– A buy and hold strategy where the bot doesn’t trade until it reaches a set price, at which point it will look to sell. It also automatically seeks out any opportunities for arbitrage trades (buying on one exchange and selling in another) by monitoring prices across different exchanges like Coinbase or Binance. This is a conservative but profitable approach that can be good if you’re just starting out as an investor looking for long term gains.
– A high frequency trading strategy where the bot monitors many markets simultaneously for short periods of time–usually seconds or minutes. These bots quickly react to market changes with conditional orders based on your preprogrammed parameters – meaning they’ll only execute an order when certain conditions are met and no sooner.
– A trend trading strategy where the bot will look for specific patterns in price movements over time to try to predict whether prices are going up or down, looking at indicators such as moving averages (a running average of a set number of previous data points). The more past data that is considered when calculating an indicator like a moving average, the more accurate that indicator becomes in predicting future price movements.
– A breakout strategy where the bot will monitor prices and enter a trade when it notices a preprogrammed set of conditions such as an asset breaking out from a trading range or a price bar closing above the prior three bars.
– A momentum strategy where your bot will enter trades when it notices that prices are exhibiting sustained and measurable increases in speed (momentum) such as an asset moving rapidly higher following periods of consolidation, which is often followed by another period of consolidation.
There are many more, but these are the most popular ones.
Is There Still a Place For Human Traders?
Definitely!
We all know and have seen that the market can be unpredictable at times – remember Covid19? -, and as a human trader you have the ability to react quickly to changing conditions without having any delays.
You also get information about what is happening in the world that could affect your trading decisions such-a market news or company announcements.
Also, human traders can use their intuition to make better informed decisions on trades when faced with situations where it’s not clear which way prices will move next.
It’s very common for financial institutions around the world today to employ automated systems of one form or another for tasks like executing orders, managing risk exposure, and performing analytical calculations related to portfolio construction.
Should You Build Your Own Automated Crypto Trading Bot?
If you’re still interested in having an automated crypto bot of your own that can make important analyses, and execute actions based on those, then you should consider building one.
You can read more about how to create your own crypto trading bot, e.g for Binance, here:
https://www.trality.com/blog/create-binance-trading-bot
Alternatively, if you are proficient in coding, you can check this guide on how to code the bot in Python:
https://www.trality.com/blog/build-python-trading-bot
