If you’re a beginner, you may find it difficult to keep the track of highly volatile cryptocurrency prices. In order to constantly monitor the price movement, crypto trading bots play a crucial role. Using bots can be very useful as they can automate trading strategies, allowing users to learn the market dynamics.
Bots can easily trade 24/7 without the need of break or human intervention. There are different types of trading bots including arbitrage bot, MEV bot, and many more.
On one hand, automated trading gives traders more freedom and numerous other benefits. On the other, there are several challenges and risks associated with them. There are risks related to scams, setting up the complex system, dependency on programmed trading and security issues.
In this article, we will look at the types of crypto trading bots and their advantages. Also, learn how to set up trading bots while understanding the risks and challenges associated with them.
What are Crypto Trading Bots?
Crypto trading bots are automated software tools that allow traders to buy and sell cryptocurrency at optimal times, based on pre-set algorithms and strategies. They trade cryptocurrency automatically on your behalf based on the parameters you set.
They monitor the market, assess information, and execute trades independently. The bots can exploit trades at any hour of the day. These bots utilize special application programming interfaces (APIs) to connect to crypto exchanges. This enables them to access market price feeds, perform trading transactions, and control their crypto assets with very low latency.
Different bots use differing trading strategies from arbitrage trading, tracking trend, to working as market makers. A bot can keep trading 24/7, taking advantage of market fluctuations even when a trader is asleep. This is particularly valuable in crypto, where price shifts can happen in the blink of an eye. The bots could generate enough returns, however, it’s likely that a bot could also lose everything. Thus, bots in trading are risky to use in an already volatile crypto market.
Types of Crypto Trading Bots
Here are the main types of trading bots in the crypto industry and their distinctive role as each one has been built for a specific purpose.
Market-Making Bots
These bots keep markets active by placing buy and sell orders at different prices. They make money from the price difference and work best when trading volume is steady.
Arbitrage Bots
They look for price differences between exchanges, making profits by buying crypto where it’s cheaper and selling where its price rises. These bots are always ready to grab the opportunity.
MEV Bots
Working on a network like Ethereum blockchain, the profit from these bots is based on transaction timing and order placement. MEV bots are programmed to effectively access and monitor the mempool, which is where all pending transactions are temporarily stored.
Trend-Following Bots
These bots watch market patterns and the trade is based on price trends. They use tools like moving averages for long-term trading decisions.
Grid Trading Bots
These trading bots set up an order pattern- buy low and sell high at set price points. They work well in volatile markets where prices swing up and down.
AI Trading Bots
Using artificial intelligence, these bots analyze data, try to predict market movements and amend their strategies accordingly.
Benefits of Using Crypto Trading Bots
Bots for cryptocurrencies are remarkable tools that bring a lot of benefits for traders. Crypto trading bots can manage multiple trading pairs and strategies simultaneously. Check some of the benefits below:
Trading without Breaks
Crypto trading bots enhance the ability to trade continuously, as these bots operate 24/7 without requiring sleep or breaks.
Eliminating Emotional Trading
People experience various emotions like greed and fear while trading and mostly end up making poor choices. The bot sticks to a predetermined strategy, so it trades based on logic and market data rather than gut feelings or panic.
Tracking Market Moves
The crypto trading bots can detect shifts in the market and carry out transactions in a matter of microseconds. Bots are much more efficient than human traders when it comes to processing data that allows the user to take advantage of price dips.
Initiate Multiple Trades at Once
Trading bots are designed in such a way that they execute multiple trades simultaneously, allowing them to capitalize on various market opportunities across different assets or exchanges at the same time. The trades are based on their programmed trading strategies.
Strategy Test Before Initiating Trade
Most bots enable users to test their strategies in real market conditions. This helps in improvising the strategy and get prepared for the possible risks before putting real assets on stake.
Reduces User Work
The bots allow users to save their time when it comes to tackling mundane activities like, setting up trades and controlling the potential losses. By tracking market movements, they change their strategies accordingly.
Risks and Challenges of Using Trading Bots
Although cryptocurrency trading bots have their perks with automation features that simplify work, there are several challenges and risks attached.
Market Volatility
The pricing of crypto assets can be surprisingly volatile. Even the best bot can struggle during a massive price shift. Though there are high chances of huge returns, because bots are fed with data, they do not account for spikes or deep drops in the market caused by sudden news.
Security Issues
Bots require access to your exchange account through APIs. If these access points aren’t securely configured, some bots are intentionally designed to scam users or execute trades that favour their creators.
Over-Reliance
In an attempt to eliminate emotional factors, people rely too much on bots. But, more automation isn’t always good. Overusing bots can narrow your focus, make you feel detached from the market, and miss certain trading opportunities that are easier to spot with manual trading.
Error in Strategy Formation
A trading bot is programmed to follow a definite script. If the set trading criteria includes error, then instead of making gains, the user has to bear losses. It is, therefore, critical to execute trade properly, analyze, and constantly enhance one’s strategy to ensure optimal results and evade losses.
Complicated Setup
Configuring a crypto trading bot could be a challenge for novice traders. Also, it requires an in-depth understanding of technical indicators and trading strategies.
How to Set Up Crypto Trading Bots?
Let’s understand the step-by-step guide on setting up a trading bot on a crypto exchange:
- Step 1: Log in to your crypto exchange account. Go to the “Trade” section and then click on “Trading Bots.”
- Step 2: After reading the terms carefully, click confirm to proceed.
- Step 3: The “Trading Bots” page will then open. Various types of trading bots will appear at the top of the page.
- Step 4: Choose the type of trading bot you prefer from options like Spot Grid, Futures Grid, Spot Algo Order, Arbitrage Bot, etc. depending on the exchange you choose.
- Step 5: Thereafter, you have to choose if you’ll copy popular strategies on a particular trading pair or will use a manual strategy.
- Step 6: In case of copy trading, there’s not much you got to do as the bot will mimic top investors’ popular strategies. However, if you choose to manually control the bot, you would have to enter details like ‘lower price’ and ‘upper price’ to determine the range you’re considering.
- Step 7: Other details like number of grids, amount of investment, base order size, DCA order size, trailing up limit, trailing down limit etc. could be needed depending on the bot chosen.
- Step 8: Once the necessary details are filled in, click on “Create” to get the bot implement the chosen strategy.
A Strategical Wrap-Up!
In the world of digitalization, crypto trading bots allow users to trade with maximum efficiency with pre-set algorithms. If you are new to the crypto industry, it eliminates emotional trading. It also tracks market movements 24/7, without any break.
As there are different types of crypto trading bots, it is advisable to test a bot in a simulated trading environment before deploying it with real funds. This ensures that the bot performs as expected and minimises the risk of unforeseen losses.
