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There are two ways of making money while trading crypto. One is to buy coins or tokens and hold them (or hodl in crypto lingo) while expecting their value to appreciate vis a vis fiat money. It could be the USD, Euro, GBP, or any other currency out there.
The second method is to trade various crypto assets actively. The idea is to buy a basket of tokens or coins and, based on their price difference between them, exchange them one for the other. In a crude example, you could see the price BTC/ETH and if ETH is in relative term gaining over BTC trade one for the other. Then exit and exchange the profit to fiat.
This method also branches two ways. For one, you could sit for hours in front of a monitor and manually buy cryptocurrencies based on your analysis and exchange them (it is called discretionary investing ). Or, you could program and obtain a trading bot to do the buying/selling at higher speeds while reviewing the aggregate data (Algo trading or High-Frequency Trading).
Crypto trading slightly differs from the traditional trading world. It is very volatile, and perhaps the only market where assets change their price in double-digit percentage points a day. Also, it is open 24 hours, seven days a week, year-round. Always somewhere in the world, people are buying and selling crypto.
In the first case, a trading bot can automatically weigh the current volatility based on past market data and execute trades in a fraction of a second. That helps with the moment to moment changes to time the market correctly.
In the second case, a bot will operate all hours of the day. Some of the best opportunities for profit are when a region of the world is getting to sleep and another waking up. A large number of participants leave the market during the change creating arbitrage opportunities.
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In the early days of the crypto investing world (2011–12), buying from an exchange was a simple matter. A person would create an account, log in, buy some BTC, and move it to a wallet.
Nowadays, when you try to place an order on any popular cryptocurrency exchange, you will see another order placed right above it, at a small higher price. And it forces you to pay a slightly higher price.
Just because an offer was immediately countered by a better one does not mean that someone is always trading in front of the computer. The offer was made by a crypto trading bot that made a fraction of a second decision to buy a little bit higher. The best trading bots have taken over the entire cryptocurrency trading ecosystem. These trading bots execute around 75% of all trades because they are more efficient than humans, especially when it comes to trading.
So, manual traders pay small price increases every time they place an order. Each one individually is nothing more than a nuisance, but in aggregate, they can cost a lot of money. Or make a lot of money for their users.
Fraud and theft is a common feature of the crypto world. Trading bots are no different. To use one, you have to give it access to your funds and account. Always research a bot performance thoroughly, and only use new ones if you can analyze the code yourself.
A software crash can be devastating while trading. It can leave you with a bad open position at a crucial moment or make you miss a substantial gain. So, read thoroughly about the performance of any bot before using it. And test it using historical data and document how well it does during periods of high usage.
Now, this is not as straight forward as it seems. There are a lot of factors that impact overall profit. Again, research past performance of any bot and test it on historical data (backtesting).
Backtesting is a must when considering using a bot. By doing this, proper parameters can be determined, and optimal conditions of usage established.
Some bots are trademark protected. It means the code is not open to see, even if you buy it. A bot like this was made by professionals, and the lack of openness comes with certain guarantees. On the other hand, an open-source bot can be analyzed and even modified, with the proper expertise. There is trade-off either way.
A bot that comes with a user-friendly interface is essential, especially for a non-technical user. The ability to control bots with just a few clicks is something you should look out for, and research before choosing to use any particular one. A plus is drag and drops options to create trading strategies. A few bots offer this, which is of great help.
A lot of trading bots allow you to create strategies using a drag and drop. It is helpful for users who lack programming skills. So if you are not a programmer, always go for trading bots, who provide this functionality.
The ability to divide an order of buy/sell and submitted to more than one exchange to maximize results.
Perhaps one of the most crucial features of any bot is the capacity to use historical data to verify your trading strategies, this is called backtesting. More advanced trading bots can also be trained with historical data for better outcomes over time.
Professional traders use trading indicators all over the world. The ability to use multiple trading indicators in your trading strategy is a significant feature to make sense of the trading trends and use them.
Now, there are some downsides to using a bot to trade. First, faulty software risk always exists, even though it is admittedly less frequent. Not all bots are made by professionals, and even pro-bots are not perfect.
Bots are built on specific codes and algorithms that help them function. Mistakes can happen during the development process, leaving the bot inefficient at particular points in time. Also, some bots are modified by users and can mess up the original design.
Second, human error. A bot is just a tool that can be misused. A lot of people think that an automatic bot can be left to its own devices, and the user can just go to sleep. It is not true, and unexpected errors can happen. Always review the data reports and never grant access to a bot to the entirety of your assets. Place coins in different accounts and limit exposure for an individual trading bot.
Trading bots have become endemic in the crypto investing world. All major exchanges are plagued with them, and they do offer significant advantages for professional or semi-professional traders. If you are in any of those categories, do give them a look with proper research. But for casual crypto users, they do not offer a great deal of value.
This article is contributed by Sebastian Pereira.