Crypto Trading Bots: A Simple Guide for Beginners
The crypto market is highly volatile. It’s not uncommon to wake up to either huge losses or massive gains. As a result of this high volatility, traders are warming up to the use of cryptocurrency trading bots to help them keep an eye on their trades at all times.
Perhaps you already know a thing or two about crypto trading bots. Maybe you have even heard the success stories of traders who use bots, and they rake massive passive income from the crypto markets.
We’ve done extensive research and put together a comprehensive resource to help you get started along with ten tips that will help you use trading bots successfully.
Please note that we recommend only using bots if you are fully confident in your technical savviness. If you haven't already read our article on trader bot scams, I highly recommend you read that one first!
In this post, we explore the following:
- What are cryptocurrency trading bots?
- How do crypto trading bots work?
- Why should you use crypto trading bots?
- When can you use trading bots?
- How do you pick a trading bot?
What are Crypto Trading Bots?
A crypto trading bot is a software program that trades on exchanges automatically. Instead of a trader executing trades manually, the bot can automatically place trades by accessing information from a user’s exchange account. Since computers are used to manage this process, bots offer a level of precision and speed that is not possible with humans.
How do Crypto Trading Bots Work?
Crypto trading bots work by accessing data on an exchange. To access this data, you need to provide the trading bot with your public API and private keys. Having these two keys proves to the exchange that you have given the bot authorisation to access your exchange account information. Let’s unpack this concept further.
API keys help applications outside the cryptocurrency exchange to access features and information inside the exchange. Trading bots can use these APIs to request information about the funds in a user’s account, the latest market data, and execute a trade for a user.
An application is only granted access to a user’s account when it has the API keys. A user can withdraw this access anytime by deleting these API keys on the exchange, which means that the user still has full control over who can access information on their trading account.
Why should You use Crypto Trading Bots?
Trading bots are generally made to automate tasks that consume too much time or are too complicated for humans to execute manually. The difficulty levels of these tasks can range from automating a trading strategy on one trading pair to routing trades between multiple assets for a diverse portfolio.
Some bots can even allow users to implement a complete portfolio management strategy hence saving them a lot of time. Bots execute your trades day and night, allowing you to take a break from manually adjusting your portfolio and placing your trades.
Bots also come in handy in improving a manually implemented strategy. A bot can crunch numbers faster than any human can, collect data quickly, and place orders more precisely.
When can You use Trading Bots?
There are limitless possibilities when using trading bots. There are bots for data collection, portfolio management, rebalancing, smart order rerouting, among other tasks. Whatever you may be looking to do, there’s a bot out there that does it.
However, this is not to say that you should deploy a bot to do every little task you want to do. That would end up being more cumbersome. Instead, you need to find the primary jobs that consume most of your time or the most complex tasks and then find a bot that can automate the process. You can continue performing the infrequent and manageable tasks.
Before you go on the hunt for a crypto trading bot, take time to consider all the trading tasks you do daily. Create a small list of significant tasks you would like to automate, so you have more time to spend on your crypto portfolio.
The following aspects will help you find some of the tasks you can automate:
• Repetitive tasks
Tasks that need doing, again and again, can be time-consuming. You can set up such functions with a trading bot the first time you do them and then “paste it over and over again” in the future. Automation is basically like a copy-and-paste for work.
Imagine that you have just discovered that 1-hour rebalances historically seem to be more effective than any other alternative frequencies, and you decide to start rebalancing your portfolio after every hour. To do so means you have to stay online all the time, calculate the percentage of each asset in your portfolio, determine optimal rates, and execute the trades. It’s practically impossible to do this each hour.
Any human would go crazy with that sort of repetition. But bots have no problem with repetition. In this case, you can create a bot to rebalance your portfolio forever.
Precision is vital in trading. As you become a more experienced trader, you will realise how important it is to be precise and careful when selecting trades.
Let’s say you want to buy a cryptocurrency when the price hits a particular mark, e.g., $ 80,000. You would have to be incredibly patient and skilful to achieve this. Manual implementation of such a strategy would end up with you missing the mark. Even if you miss it by about $10, it is still not what you had planned in your strategy.
Nothing beats bots when it comes to the implementation of a precise strategy. They can monitor the market conditions and execute the trade exactly when the asset price hits $80,000. Bots are accurate, quick, and reliable.
If you are like most people, you can’t be at your computer all day and night, keeping your portfolio on track.
A good example is the rebalancing we talked about earlier. For a simple portfolio, you could end up using fifteen minutes each hour to balance your portfolio. A more diverse portfolio would take even longer.
While such processes can be tiresome, repetitive, and time-consuming for you, they are almost instantaneous for a bot. Since bots run on computers, they can calculate and trade in an instance without getting tired.
• 24/7 Markets
The crypto market never sleeps. Exchanges operate on a 24/7 basis, making it impossible for you as a trader to monitor your portfolio continually. Eventually, you will need to take a break.
Traders have two options: either accept the consequences of not being around to check on your portfolio or have a bot do it for you. Most people would prefer to leave it to a bot than have sleepless nights.
• Complex trading tasks
Think about a strategy such as smart order routing. There are countless requirements for routing trades through several trading pairs.
Such a strategy is out of reach even for some of the most advanced traders, which is why such an approach should be automated using bots.
How do you pick a trading bot?
With a plethora of bots on sale out there, what aspects should you consider before you settle for one? Continue reading to find out.
• Team reputation
It’s essential to check the reputation of the team behind the bot. Hackers have previously taken advantage of system vulnerabilities to cripple users. A good example is when hackers pumped the price of Syscoin on Binance by using trading APIs. Your first of line defence against hackers is to have a trusted founding team.
Use the following to evaluate the team members and gauge their level of reliability: companies they have worked for, how long the team has been working on the bot, the members of the advisory board and their reputation, and the founding team’s technical ability.
• Automated strategies
You also need to be sure that the bot you are buying automates the procedure that you are looking to automate. It would be a waste of time and money to choose a bot that only works with moving average cross overs if you are looking to rebalance your portfolio.
Also, check out the configurations that are needed for the bot lest you end up with one that brings forth more work than performing the task manually.
Another crucial aspect to consider when buying a bot is their customer care. You should be able to get help when you have critical questions about your strategy or need help with bugs.
Here are ways I identify a bot with excellent customer support. An active telegram community where the team is online, and answers questions, diverse avenues to contact them, and the support team quickly responds and resolves issues.
Price is a big determiner of whether or not you will end up using a trading bot. You want to maximise your portfolio, so you need to ensure that your bot subscriptions will not overeat into your earnings.
• Ease of use
You will find that most tools in the cryptocurrency market are overly complicated in design. Trading bots are not an exception. Most trading bots have many levers, configurations, settings, and options. Using an excessively complicated bot can lead to frustration. Go for a bot that you can use comfortably.
10 Tips For Successful Cryptocurrency Bot Trading
1. You will spend before you earn
Like is the case with most other things, you need to invest in a good trading bot before you start seeing results.
Bots come at varying prices depending on the functions they perform and the markets they operate. As such, you need to do your research before you decide on a bot. It pays to have a bot or two to help in your trading, but never choose one on a whim. The more careful you are when choosing a trading bot, the higher your chances of success.
Factors you need to consider here include; the reputation of the team that created the bot, the type of strategies the bot supports, customer support efficiency, ease of use, and cost. Choose a bot whose subscription will not overeat into your profits.
2. Try your bot in a demo account first
To ensure that you are investing in a cryptocurrency trading bot that is right for you, try it in a demo first. Most bot providers will give you a one-month demo for little to no cost.
Trying a demo gives you ample time to learn how its system works and decide whether it’s suitable for your trading strategy.
3. Consider making your own crypto trading bot
Although it often pays to buy ready-to-use crypto trading bots, you don’t want to keep trying a new one each month. You will soon realise that you need to settle for a bot that will offer the best results for the long term growth of your cryptocurrency trading portfolio.
Nothing beats making your own.
Creating your own bot requires you to have vast knowledge in crypto trading, cybersecurity, and coding. It will be a big challenge to take on, but if you are conversant with these areas, it’s worthwhile.
4. Ensure your bot is compatible with your preferred exchange
Whether you choose to buy a bot or to develop one, confirm that it is compatible with your favourite exchange before you get to work. It would be a bummer to purchase one only to realise it’s not suitable for your trading platform. Generally, you will find that most crypto trading bots are compatible with most exchanges.
5. Take time to create a robust strategy
While the trading bot will do most of the work that goes into growing your crypto portfolio, it should not entirely replace you. You still have to be the one to implement a trading strategy. Your strategy is vital to your success, and it is a step that cannot be taken lightly.
If you are new here, your trading strategy is the set of rules that govern your overall approach to crypto trading. It defines the conditions under which you are most likely to gain profits and outlines how you can engage them.
A good trading strategy should consist of the following parameters. Risk- how much risk are you willing to handle on the trade, Price- at what price is the trade going to be executed, Quantity- what amount of capital are you investing in the trade, Entry trade- based on your strategy the entry trade will perform a buy or sell action at a predetermined price, and exit trade- at what position do you want to exit the trade?
6. Back-test your trading bot
Backtesting allows you to simulate the performance of a strategy over past data to understand how it behaves under certain conditions such as low crypto volatility, high crypto volatility, and much more. Doing so helps you predict how the strategy might perform in the future. It’s not a guaranteed method because crypto trading can be highly unpredictable, but it is currently the most reliable method for evaluating a trading strategy.
Make sure you choose a bot that has backtesting. It is not recommendable to implement a strategy that has not been backtested. In the cryptocurrency world, venturing blindly into the future is a recipe for disaster.
Take your time to evaluate your strategy, discover the best configurations, and implement the strategy in a way that aligns with your trading goals and the information you have collected in the backtesting process.
7. Avoid giving your bot withdrawal access
The awesome thing about bots is that they have the capacity to execute all the instructions from your trading strategy (when to buy, sell, and hold, etc.). Try not to give it too much freedom.
For instance, giving your bot withdrawal access is a bad idea. You risk losing your money. Not only could your bot trade more money than you would have chosen to spend, but you could also open a door for hackers to access both your cryptocurrency account and bank account.
8. Use two-factor authentication
Two-factor authentication is a great way to keep hackers at bay. When you are using two-factor authentication, it is like you are giving your password, yet another password.
This ensures that your private information is well secured while you navigate the different cryptocurrency exchanges and markets with your trading bot.
Also, don’t share your APIs with anybody, even if it’s a friend. You never know what kind of trade they will place for you or if they will run off with all your cryptocurrency.
A really good 2FA provider is Authy.
9. Be on the lookout for the latest crypto news
Since crypto trading bots are automated, they are limited in terms of how they react to emerging news such as hacked trading platforms or the ban of cryptocurrencies by individual governments.
News can affect the price of a cryptocurrency positively or negatively. Remember to stay up-to-date with the latest crypto-related news so that you are in a better position to make wise investment decisions.
10. Watch out for scams!
Whether you are trying to figure out a strategy or purchasing a new bot, always keep your wits about you. There are many fraudsters out there waiting to take advantage of every opportunity to swindle you. It pays to be vigilant. If something seems too good to be true, stay well away!
We have a few resources to help you stay aware when it comes to scams. Make sure you familiarise yourself with them.
Crypto trading bots can go a long way in enabling traders to always interact with the crypto markets, even when they are physically unable to do so. What’s more, they help eliminate stress and emotions associated with trading the volatile markets.
However, they are not for everybody. For instance, if you are a casual investor and you intend to buy and hodl cryptocurrencies, then a trading bot may not be a suitable investment for you. On the other hand, if you are an active trader with a deep understanding of crypto trading strategies, a trading bot can be a valuable trading tool for you.
Be open to new information and be willing to learn. Successful bot trading doesn’t come with a foolproof recipe. You will need to develop your own method while on the move. So, you need to stay alert and keep trying out new strategies without getting tangled up in the intricacies.
We hope the above tips help you get started with crypto trading bots without running into any pitfalls.
Over to You
Share your thoughts and experiences on bots in the comment section below.
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 09/11/2019