Trading cryptocurrencies is a tricky affair. As opposed to the stock market, cryptocurrency markets don’t close, presenting a perpetually stressful situation for both newbie traders and experienced investors alike. When you take into account how cryptocurrency markets are incredibly volatile, it’s understandable that one may be put off by the idea of trading crypto altogether. No one wants to deal with massive losses, after all.

Luckily, automation is gaining traction in the field of finance, including the cryptocurrency sector. In recent years, finance has been reaping the economic benefits of AI, and it has gotten to the point that the firms are achieving company-wide revenue growth of 19%, directly attributed to their AI initiatives, as per data curated by Digitalist Mag.

Moreover, FXCM notes how systems based on automation and algorithms are becoming popular in the markets. There are now tools that offer traders a completely hands-off approach, such as forex trading bots and more recently, cryptocurrency trading bots. Developed to carry out trades and complete transactions on behalf of human investors, crypto trading bots are slowly entering mainstream consciousness. If you want to dabble in them at some point in the future, here are some things you should know:

How do cryptocurrency trading bots work?


Seasoned trader Janny Kul explains that crypto trading bots are essentially computer programs developed to buy and sell cryptocurrency at the right time, all with the goal of garnering profit. They work in three stages: signal generator, risk allocation, and then finally, execution.

The signal generator phase is when they use data to make predictions, and the risk allocation pertains to deciding how much to buy. Once a bot knows the direction and how much it should buy or sell, it proceeds with pushing through with the trade, which is the execution stage. But it should be noted that these three parts require their own distinct algorithms and optimisation processes in order to perform optimal work.

What are the types of cryptocurrency bots?


There are four main types of crypto trading bots: arbitrage bots, market-making bots, technical trading bots, and profile automation bots. Arbitrage bots assess prices across exchanges and conduct trades to take advantage of discrepancies, while market making bots places several buy and sell orders to make a quick profit. Meanwhile, portfolio automation bots revolve around helping users achieve their desired portfolio instead of active trading. Lastly, technical trading bots are known to be preferable to conservative traders, as they use indicators and signals to foresee price movements in the market and generate profit.

Is using trading bots legal?


The idea of a bot doing the trading on your behalf may seem fishy, but the practice is actually often welcomed. CryptoCurrency Facts points out that since a thin market is bad for everyone, the more buy and sell orders there are on the books, the better, so bots are definitely encouraged. In both the cryptocurrency and stock market, bot trading is rampant, but not all brokers allow it. What’s more, anything that would be illegal in standard trading settings is also considered illegal in crypto trading. This means that you cannot exactly make or buy a spoof bot without causing trouble; you would want to prioritise making or selecting a bot that follows indicators instead.

When should cryptocurrency trading bots be used?


There are many advantages to using crypto trading bots, but it is recommended to use them when you want to avoid time-consuming tasks that are repetitive, achieve a high degree of accuracy, and have something that can keep an eye on the market 24/7.

Trading bots are not passive income generators


Casual traders should keep in mind that while cryptocurrency trading bots can make your life easier, it’s not the silver bullet to generating profit. Brave New Coin notes that you will actively need to fine tune your selected bot if you want it to work the way you want it to. Keep in mind that they are not “a set it and forget it” solution — the best trader is still, of course, you.

Specially written for BLOCKCHANCE.eu
By: Ryah Juel