Crypto Trading Bots: How Do They Work?
Crypto trading bots has been a buzz phrase within the crypto community, but how do they work and will they work for me?
The cryptocurrency market is a highly volatile 24/7 economy, and profit is usually determined by how quickly you execute a buy or sell. Because of its volatile nature, even the most experienced traders struggle to consistently make profitable trades.
As a result, investors looking to create a well-balanced crypto portfolio may decide to utilize all available resources, including bots, to maximize their advantages when trading.
Crypto trading bots are virtual robots (bots) that are programmed to automate trades. A trader can program a trading bot to monitor multiple exchanges at the same time and execute predefined trading strategies. The bot will either automatically execute trades or send signals to the trader for manual execution when market conditions change.
This approach to trading is sometimes referred to as high-frequency trading, or algo trading, as it makes it possible to place multiple trades quickly and relies on algorithms to follow predefined instructions. Trading bots are estimated to account for approximately 80% of all crypto trading.
Most trading bots do not require advanced technical knowledge to operate. You can easily set them to trade a specific cryptocurrency based on your crypto trading strategy. They also offer backtesting services, which allow you to test a strategy before implementing it in your trade, significantly lowering your risk when engaging in such a trade.
Another role that crypto trading bots play is the elimination of human emotions from trade decisions, increasing accuracy.
How Do Crypto Bots Work?
Essentially, cryptocurrency bots automate the analysis of market data and its interpretation— they collect market data, analyze it, determine the potential market risk, and then execute buy or sell orders based on these calculations.
Most crypto trading bots operate by connecting directly to a cryptocurrency exchange and monitoring the market for predefined market conditions, say specific events or price changes. They then either send out a signal for the user to act or make a decision based on the instructions defined by the trader and perform the required buy or sell on their own. Some even use historical data to make more informed decisions.
Trading bots come with different user interfaces: some are browser plug-ins, some are downloadable apps, and others are cryptocurrency exchange software.
Most crypto trading bots operate in four key stages: market data analysis > signal generation > market risk prediction> execution.
I. Market Data Analysis
In comparison to humans, bots are quicker, smarter, and better at identifying, gathering, and analyzing mountains of data. The bot collects and interprets raw market data to determine whether to buy or sell a specific cryptocurrency asset at this stage.
II. Signal Generation
A bot’s signal generation makes predictions and identifies potential trades based on market data and technical analysis indicators. To obtain more refined results, the trader can customize the type of data fed into the signal generator sector.
III. Market Risk Prediction
At this stage, the bot uses market data to calculate potential market risk based on a predefined set of parameters and rules by the trader. The bot then decides how much to invest or trade based on the information.
IV. Execution
This is the final stage. It employs APIs (Application Program Interface) to buy or sell cryptocurrency assets based on signals generated by the preset trading system. The signals generate buy or sell orders, which are then sent to the exchange via their API keys.
Classification of Crypto Trading Bots
· Technical Trading Bots
Even for the most seasoned trader, charting takes time. A technical crypto trading bot uses predefined technical indicators to look at the metrics on the charts and take action almost immediately.
· Arbitrage Bots
Arbitrage is a trading strategy that takes advantage of market inefficiencies by exploiting price disparities between exchanges. Crypto arbitrage bots are designed to monitor price differences between cryptocurrency coins and tokens across multiple exchanges— to later buy a coin in an exchange where the price is lower and sell where it is higher.
Markets move fast and exchange prices may be slightly delayed. As a result, arbitrage bots move quickly to buy and sell an asset at the same time to take advantage of the differences that already exist.
· Coin Lending Bots
One of the easy ways to make money in crypto is to lend coins to margin traders who will repay the loan with interest later. Coin-lending bots automate this process, allowing you to spend less time trying to find the best interest rate and capitalize on potential spikes in lending options.
They strike a balance between loan supply and demand, resulting in optimal interest rates for all currencies supported.
· Market Maker Bots
The key principle here is to sell to investors as frequently as possible at a price higher than the selling price. The spread will be wider and the potential profit for market maker bots will increase as the trading activity on the asset increases.
Market maker bots make money by placing orders at prices other than the market price. They scan markets with wider spreads around the clock, every day of the week, giving the trader a time, volume, and price advantage.
How Do I Choose the right Crypto Trading Bot?
Here are some factors you would want to consider next time you’re in the market for a trading bot:
• How user-friendly is the bot? Ensure that you can understand and utilize the bot’s technology successfully.
• Ensure the bot’s strategies meet your needs.
• If you’re new to trading bots, start with the one that has pre-programmed strategies.
• Look for a bot whose fees are clearly stated and upfront, with no hidden costs.
• Do your research on the development team of the bot—their contact information, support team, and website profile
• Read the reviews. What are other users saying about the platform?
Can I Create My Own Trading Bot?
Yes, you can. The question is, would you want to?
The programming language you should use is determined by the characteristics and capabilities you want in your bot. However, it is best to code in a language with a large user base and a thriving crypto ecosystem. The ability to easily scale, modify, and add to it is another requirement, especially if you want to interact with the community to promote growth.
Python and JavaScript are the most commonly used programming languages for developing trading bots. If you are not a skilled developer, then choosing a pre-made crypto bot would be best in that situation.
A Crypto Bot to Try Right Away
Did this article on crypto bots get you excited? If so, Stoic AI is a great way to get started with crypto trading bots, as it comes loaded with 3 different strategies to choose from. Whether you are a beginner or a seasoned investor, Stoic has a long history of performance that stands the test of time. Go here to give it a try.
Key Takeaways
- Trading bots communicate directly with crypto exchanges and place orders automatically based on a trader’s preset conditions, providing exceptional speed and efficiency, fewer errors, and emotionless trading.
- A crypto trading bot can be a great way to learn the ropes if you’re unable to monitor the market 24/7 or if you’re a new trader. They can assist you in catching market moves while you are away from your computer, making more informed decisions, and avoiding costly mistakes in the market.
- A crypto trading bot can come as a browser plug-in, downloadable app, or a cryptocurrency exchange software.
- Crypto trading bots automate the trading process in four steps: Analysis of market data > generation of signals > prediction of market risk > and trade execution.
Related articles
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What is a Crypto Wallet?
What is a DAO?
Author:
Ken Melendez
✍️ Head of Content @ Cindicator
📊 Certified Bitcoin Professional
🔐 Blockchain Chamber - Chapter President
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Disclaimer
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.