What Are Trading Bots?

Trading on a cryptocurrency exchange differs a lot from stock trading mostly because the cryptocurrency market never closes making it difficult for traders to remain in control of their trading continuously round-the-clock. The high volatility of the market leaves its imprint too with the rates changing too often, thus сomplicating the process.

While trading twenty-four hours a day seems utopian, using a trading bot capable of tracking the rates and making timely trades without any emotion sounds more realistic and sometimes even more effective. A trading bot may be a good choice to boost your portfolio as it does not need to sleep and is not influenced by a human factor. This contrasts with traders who are physically incapable of monitoring market movements all the time and susceptible to emotionally centred decisions.

What is a trading bot?

It is an application that works according to the preset parameters. Indeed it is not a magician who can guarantee profitable trade and calls on the right decisions to buy or sell in the right timing. However, it consists of a set of indicators and algorithms to detect trends and perform trades automatically on your behalf.

Types of bots

  • An analytical bot collects the information and based on the data received provides its analysis which can be used to answer three important questions, that is, what, where and when to buy or sell. Its big advantage is a possibility to process large volumes of information within a short period of time.
  • An assistant bot helps to trade under predetermined algorithms and can be useful with its metrics generated when trading on several platforms. It can hint that your portfolio is exposed to certain risks due to varying factors. In this regard, it prompts you to make an appropriate decision, thus acting as a risk manager and preventing you from losing money.
  • A trading bot performs trades automatically on your behalf acting as a trader within the preset parameters.

    It is also possible to create a sort of an automated trading system combining these bots, thus profiting from all three.

    Some bots use algorithms predetermined by developers or traders, and some are designed to copy the strategy of established traders. However, no bot has the ability to decipher market activity, news updates or give outlooks on cryptocurrency performance, and this is a notable shortcoming.

    Human input is still sought after to prevent unforeseen losses and increase possible profits. Here we consider its advantages and disadvantages.

    Strength

  • Analysis
    Analysing the market and searching for certain patterns. Acting according to the determined patterns.
  • Assistance
    Acting as an assistant. For example, if you manually open several positions, you need to calculate the stop-loss, tale profit or the volume of your position for all the positions you open keeping in mind previously opened positions. A bot can do all this automatically in a short period of time.
  • High capability
    Examining the market in a wider way. A possibility to examine simultaneously a huge number of resources.
  • Human factor-free
    Human factor reduced to 0.
  • Availability
    Available 24/7.
  • Disposition effect-free
  • In behavioral finance, it is a tendency of investors to sell assets that have increased in value, while keeping assets that have dropped in value.

  • A greater number of possible operations
  • Many small trades allow operating more efficiently at the low-liquidity markets.

  • Testing available
  • There is a possibility to test each trading bot and thus to see a potential result.

    Weakness

  • Emotion-free
  • A bot can’t feel anything. So if something goes wrong at the market, a bot can not stop, as it acts according to a preset algorithm.

  • Skills required
  • To write a bot and to connect it to a platform, you need to learn how it works and train.

    Getting the needed result using this tool takes time and requires testing. For more comfortable testing it’s better to use smaller amounts of capital and a low percent of profits. After acquiring a certain experience you’ll be able to use all the opportunities a trading bot provides at the same time keeping in mind its weaknesses.
    A bot may be really an effective tool for those working full-time and not having much time to analyse the market, manage the trading process and track rates. Using a bot can speed up the market analysis process, automate the trading flow, and increase the trading volume.
    To try out using a bot, you can browse through our open API library!