What You Should Know About Cryptocurrency Trading Bots
Investing in cryptocurrencies can be intense, don’t you agree? Either because the market works 24/7, because of its volatility, or because you can’t always spend as much time as you’d like to analyze it. There is no lack of reasons. Crypto trading bots can help simplify your trading experience. 3Commas is one popular solution that works on major exchanges. How about you check this article to understand more about this Binance trading bot.
In an increasingly technological daily life, it would be good if you could also count on extra automation in trading, right? Well, it is possible! Cryptocurrency trading bots are an extension of your way of thinking and acting in the markets.
This is an area where bots make perfect sense, as it’s impossible to be “connected” to the topic all the time. This way, you can give specific indications to your trade bot to continue trading when you are not.
In this article, you will understand what trading bots are and how they automate part of your trading process and thus have more advantages in your investments.
What are Trading Bots?
Trading bots are computer programs that operate directly on an exchange on your behalf. They can place buy or sell orders, depending on the information the market gives them. They analyze, for example, volume, purchase orders, or price.
But more than that, trading bots obey any command literally, according to inputs that someone provides them. This type of computer program is not new, and it also exists in traditional markets. However, their prices are often unthinkable for most traders. To some extent, the blockchain has democratized access to these bots, as major exchanges let traders program their trading bots directly through APIs.
From the point of view of exchanges, giving this type of access is even a good business model. More trades mean more commissions you can charge. The cryptocurrency market works non-stop. That’s why bots are a way to give professional traders the possibility to control their investments even when they are not connected. That way, they can manage investments more efficiently, and without the stress of thinking, they can wake up the next day with their positions diluted.
Do Trading Bots Work?
The straight answer is yes. The advantages of having a program running your commands even when you are not aware of market developments are apparent. Furthermore, they can execute operations much faster than a human would.
The speed with which they process data makes the bots authentic technical analysis machines. They can best respond to indicators, predicting, for example, price behavior based on volume. However, its capacity is limited. The trading bot can only analyze what is happening in the markets and not the factors that are external to them. And in the world of cryptocurrencies, there are several factors with the ability to influence the price.
Crypto Twitter is an inexhaustible source of rumors about cryptocurrencies, and many of them influence prices without a bot being able to predict or react accordingly. Another disadvantage is that many bots rely on exponential moving averages, i.e., they draw conclusions based on a summation of past behavior and act accordingly.
Of course, history is never a guarantee for future behavior, especially in a volatile market like cryptocurrencies. Just because the market went up once doesn’t mean it’s going to go up this time too.
Trading bots can be beneficial, but the best strategy is always a hybrid between the technical analysis of the markets and the influences of the real world. Ideally, you should ensure that you use a bot that follows good directions, preferably ones you feel safe with. A bot that follows the wrong guidelines will also make bad investment decisions.
The golden rule here is that for a trading bot to work, it must follow instructions that allow it to succeed in the market. And this mainly comes from the knowledge of those who are operating with the trading bot. Anyone who thinks that just downloading the trading bot and saying “Make me rich” is wrong.
Pros and Cons
As you may have already noticed, trading bots have advantages and disadvantages. As we’ve already seen, there are features in which a bot cannot have human perception. In other cases, a human cannot perform tasks as quickly as a bot.
- They are more efficient because they eliminate human error. Unless the human has given you the wrong indication;
- Greater speed and ability to avoid errors make them very cost-effective solutions;
- While you sleep, your bot doesn’t rest and doesn’t eat either – except for a monthly fee in some cases;
- They have no emotions, nor do they suffer from stress or fear. Wrong decisions are often made for one of these reasons;
- The automation potential is incalculable, as there is always room to introduce new algorithms that assess markets or information available on the internet.
- There are dozens of other options, and there is always the potential for scams;
- Trading bots have a cost to perform a function that you usually do without price. It must be ensured that this cost is justified with profits. It is also important to check the usage fees of bots, as some have costs in addition to subscription plans;
- Sometimes a bot cannot add as much value as a human, particularly with regard to external factors, such as interactions on Twitter;
- Artificial Intelligence still depends on human input. A volatile market such as cryptocurrencies is always up-to-date and needs new input frequently;
- Last but not least, remember that a trading bot needs to follow good instructions to be effective. If you don’t have a thoughtful strategy, it will be harder to get good results.
Several options are available, so you should consider that a trading bot that works for one investor may not work for another. More than that: for some investors, it may not even work at all, as their type of strategy may not be adapted to the automation carried out by these programs.
If in doubt, it might be helpful to do a test run, preferably with a free bot, to see how you get along with these programs. Also, even if you use a bot, the ideal is always to follow a hybrid model, in which you add value in specific fields and the bot in others. So you’ll have the best of both worlds.
In addition to the solutions presented in this article, consider that most exchanges already give you some automation options, such as stop-loss. If you choose to use a platform like eToro, be aware that it already has strong social trading components.