Can automated trading tools simplify crypto trading?

Common crypto trading challenges

Crypto traders face several challenges on the crypto market in comparison to trading fiat currencies or stocks on traditional financial markets. 

Volatility of the cryptocurrency market is an ongoing worry. Immature markets tend to move unexpectedly and make trading activities more difficult.  

The lack of regulation in the crypto market can expose traders to certain legal and financial risks. Without laying down clear rules and guidelines, fraudulent activities and market manipulation are more prone to happen. 

Another highlighted concern is security; because of the occurrence of fraud within the crypto ecosystem, crypto traders need to take proactive measures to protect their crypto assets. Sometimes altcoins with a small market cap demonstrate risks of fraud and price manipulation from the very start, but it is not an easy task to detect these signs on time.  

Understanding all the aspects of blockchain technology and cryptocurrencies can be confusing for novice users. Crypto traders must become skillful enough to safely navigate the crypto environment that includes learning about types of cryptocurrency analysis, risk management techniques and developing research skills. 

You can improve your crypto trading knowledge by enrolling in the crypto trading course on our LearnCrypto Academy. 

Finally, psychological factors impact trading as well. Human emotions assume a major role in trading decisions which can lead sometimes to impulsive decision-making processes. A trader’s judgement can be clouded by fear, uncertainty or greed. To reduce the impact of emotions on crypto trading, traders turn to automated trading tools.

What is automated crypto trading?

If you are trading in a market that can fluctuate within seconds, it is important to keep monitoring your positions and be able to decide quickly. That is where automation jumps in to help crypto traders. 

The process of automated crypto trading, as a form of algorithmic trading, includes the use of software to execute trades according to predetermined criteria. Automated crypto trading eliminates the need for traders to react rapidly to sudden market movements and market trends.

Advantages of automated trading strategies

Implementing automatic trading strategies or having a computer monitor the markets to spot instant trading opportunities and execute them has its perks.  

As already mentioned, keeping human emotions in check means that traders are not able to act irrationally – automated trading helps both traders who are afraid to ‘pull the trigger’ and those who are susceptible to overtrading. 

Backtesting is another benefit of automated trading strategies; when an automated trading tool is being designed, all rules need to be absolute and leave no room for interpretation. The computer must be told exactly what to do. Traders are enabled to utilise precise sets of rules and test them on historical data before taking any risks in live trading. 

Automated trading strategies strengthen discipline and consistency. One of the biggest challenges of crypto trading is to plan trades and stick to the plan. A perfect trading plan doesn’t exist as losses are part of the game.  

However, psychological factors may come into play and ruin the carefully planned trading plan. Automated trading tools enable traders to achieve consistency and stick to the plan. 

Finally, the algorithmic trading software responds immediately to changing market conditions so order entry speed is improved. Within the crypto realm, getting in or out of a trade a few seconds earlier can make a significant difference.

Explaining crypto trading bots

A crypto trading bot refers to a software program that monitors and executes automated trades on behalf of the users. Crypto trading bots analyse real-time market data, and execute pre-determined trading strategies, along with maximising profit while minimising risk.  

Think of trading bots as digital assistants that constantly monitor the market and execute buy or sell orders based on predefined criteria. Automated trading provides a hands-free approach to cryptocurrency trading.

How do crypto trading bots work?

Automated crypto trading bots utilise APIs (application programming interfaces) to connect to multiple exchanges and execute transactions.  

These refer to automated tools that gather real-time data from various sources, monitor it, and interpret it to assess which coins are the best to trade at a particular time. 

A crypto trading bot executes trades by using pre-defined parameters set by the trader such as buying and selling triggers, profit targets, and stop losses.

Divergent types of crypto trading bots

To execute profitable trades and become an advanced trader in the realm of digital assets, it is important to understand different types of automated trading and their main features.  

Let’s briefly explain some common types of trading bots within the crypto trading space.

Trend-following crypto trading bots

Trend-following bots refer to algorithms created to identify and capitalise on current market trends. Such bots utilise technical indicators to identify existing trends and execute trades accordingly.  

Trend-following bots typically include advanced chart analysis abilities to execute trades based on the prevailing market direction. Some common trend-following strategies are, for example, trendline breakouts, Fibonacci retracements and the moving average crossover.

Arbitrage bots

Arbitrage bots include trading the same digital asset on multiple exchanges to take advantage of price discrepancies and gain profits accordingly.  

By constantly monitoring crypto exchanges, they exploit price discrepancies and execute trades based on profit opportunities. 

An arbitrage trading strategy can be, for example, statistical arbitrage, cross-exchange, and triangular arbitrage.

Portfolio management bots

Portfolio management bots encompass advanced risk management characteristics and dynamically optimise a crypto trader’s portfolio to minimise risks and maximise potential returns. 

To find out how to create a balanced crypto portfolio, why not read this article: 'The concept of a balanced crypto portfolio'.

Market-making bots

Market making bots include providing liquidity to crypto markets by placing both buy and sell orders at slightly divergent prices. These trade bots create a fluid market environment to profit from the bid-ask spread and potentially reduce market volatility.  

Market making strategies typically include scalping, ping pong and grid trading strategies. For example, a grid trading bot gradually buys assets when prices fall and automatically sells when the market recovers.

Sentiment analysis bots

In simple terms, sentiment analysis bots examine the mood on the market. These automated trading bots assess market sentiment by providing a data analysis of sources such as social media and news. 

Mean reversion bots

Mean reversion bots are based on the principle that prices of digital assets tend to revert to their historical average over time. Therefore, these automated trading bots are used to identify potential price reversals and gain profits based on market corrections. 

Main reversion trading bots utilise statistical analysis to determine oversold or overbought markets and take advantage of price discrepancies. Some common mean reversion trading strategies involve RSI and Bollinger Bands.

Benefits of utilising crypto trading bots

Automated trading bots are successfully used for monitoring crypto markets since they continuously analyse market data, such as the trading volume and price movements. It is much easier than monitoring the market manually, and aids users in making informed trading decisions. 

Unlike human crypto traders, automated trading bots operate 24/7; since in the crypto environment the market dynamics can change within seconds, traders are less likely to miss any trading opportunities. 

Risk management is a significant aspect of crypto trading; trading bots can be programmed to implement such strategies and automatically set out stop losses and take profit points to help users in protecting their assets. Basically, one of the main perks of a reliable automated trading bot is its incorporation of robust risk management features.

Trade bots can implement a wide array of crypto trading strategies based on user’s preferences and risk tolerance. These strategies include the simple ones such as buying low and selling high to more complex strategies involving market making or arbitrage. Therefore, you can tailor trading strategies to your preferences, and adapt to changing market trends.

Drawbacks of crypto trading bots

While automated trading bots bring to the table many advantages and aid to crypto trading becoming a less stressful activity, these automated trading tools involve a few disadvantages. 

Monitoring issues

Even though automated trading tools sound like users can turn on the computer and leave it for the day, these systems still require a certain degree of monitoring.  

Technology-related failures can occur, such as power losses, computer crashes, and connectivity issues. Additionally, an automated tool can experience anomalies that could result in missing or duplicate orders.  

Depending on the trading platform, a trade order could be accommodated on a computer, and not on a server. In other words, if the internet connection is lost, a trade order might not be executed, and potentially create a discrepancy between traders generated by the implemented strategy and the order entry platform.

The over-optimisation risk

Crypto traders that use backtesting techniques can lay down systems that are great in theory but perform badly in a live crypto market. Over-optimisation can be defined as excessive curve-fitting that amounts to a trading plan that is unreliable in the live market.  

Achieving great results by testing on historical data can make traders sometimes inaccurately assume a trading plan should be almost perfectly profitable or never experience a downtrend to be considered a viable plan. Incorrectly adjusting parameters to create an almost perfect plan can make it fail in the live crypto market.

Potential scams

If you are a new trader still searching for a preferred system, keep in mind that those that sound too good to be true, they might be a scam. A lot of scams happen within the crypto ecosystem. 

To tell whether a system is legitimate or fake, always do your own research and make sure you know everything about it. Check the terms and conditions and reviews as well.  

To successfully avoid scams in the crypto trading space, check out this article: 'The most common crypto scams & how to avoid them'.

Can automated trading tools truly simplify crypto trading?

Now that we have explained all the main features and advantages of automated trading tools, it is clearer how they can simplify trading. Trading with bots has become very popular among professional traders as these tools help them benefit from price fluctuations and conduct profitable trades accordingly.

Automated cryptocurrency trading isn’t about cheating the market or doing tricks, yet their main advantage is to remove the impact of negative human emotions in trading and conduct a rational trading process.  

By eliminating manual trading, traders are enabled to track the crypto market and multiple exchanges, as well as manage portfolios simultaneously. One of the main upper-hands of automatic crypto trading lies in the ability to process broad amounts of market data rapidly and precisely.

Human traders can struggle to keep up with the market dynamics of the crypto space while a trading bot is able to swiftly analyse technical indicators, price movements and trends to make data-driven decisions. In simple terms, automated trading tools help traders succeed and add a new edge to their trading game.

Can they be replaced by AI?

Due to the rapid rise of artificial intelligence (AI) within many sectors and markets, many users are wondering whether it could replace automated crypto trading tools and do their jobs better. For now, the answer is still no.

At the moment of writing, algorithmic trading tools seem to be more sophisticated than trading platforms powered by AI. Automated trading tools demonstrate a higher level of transparency and predictability as they operate based on predefined rules.  

Therefore, traders can transparently assess how their traders are being executed. On the other hand, AI tools are still considered black boxes which makes it difficult for users to understand how it conducts trades. 

Furthermore, automated trading tools are customizable since users can simply modify their pre-set parameters and tailor trading strategies to their preferences and risk tolerance. 

Finally, crypto trading, similar to trading activities on traditional financial markets, is a complex and dynamic process that still needs human oversight.  

However, AI technology is progressing at a rapid pace, and in some ways, it has the ability to enhance crypto trading. If you want to find out more, we suggest reading this article: 'AI Meets Crypto: Can ChatGPT help crypto?'.