How to Use Crypto Trading Bots?

Benefits, Best Practices, and Pitfalls

The Crypto Market

The crypto market is exciting but unpredictable, making it both a thrilling and challenging space to trade. Many traders have started stepping up their trading game with crypto trading bots with automated systems that trade for you 24/7. Yes, we are talking about cryptocurrency trading bots. These bots have innumerable benefits, but they also have a set of difficulties. In this blog, we'll look at the advantages of using cryptocurrency trading bots, as well as some best practices and potential issues to watch out for.

What is a Crypto Trading Bot?

Crypto trading bots use pre-programmed orders to automatically buy and sell cryptocurrencies anytime, any day. These bots use algorithms to assess market data and are super-fast; hence, they eliminate the need for constant monitoring. Imagine your intuition is telling you that the market is going to prosper in the next couple of days. In this situation, you will trade crypto, right? Now you're going on a vacation and might not be able to trade; what to do now? In this case, bots will be very helpful, as you can set the price at which you would want to buy and the price at which you would want to sell the crypto. Voila! Your trades will be placed as per the set orders.

Benefits of Using Crypto Trading Bots

1. 24/7 Trading

Trading bots can trade continuously, without a stop, 24*7. We humans need a chill weekend to rejuvenate, but these bots don't. This quality of bots is particularly beneficial in the cryptocurrency market, which never sleeps. Bots can identify and execute pre-set orders at any time of the day. Hence, you don't miss out on any opportunity throughout the day.

2. No Emotional Bias

In life, sometimes we make decisions on the basis of our emotions and then regret later. In trading, emotions like fear and greed often lead to poor decisions. But bots? They stick to the plan, emotion-free. Bots help reduce emotional trading by functioning using logic and algorithms. It helps you follow your trading plan in a way where you are not distracted by your emotions.

3. High Speed

Compared to humans, cryptocurrency trading machines can complete trades in less than a second. Market prices fluctuate quickly; hence, high speed is important as it allows bots to take advantage of even the smallest price swing before they vanish. Imagine you are willing to place a large order at a certain price. Wow,  you see that price, and you quickly place the order. Your speed was good enough, and the order was also executed, but the price at which the order was placed and the price at which the order got executed are both different. Why is it so? This is because even if we are fast, we cannot be faster than these technologies. Therefore, in times of large orders, bots can be your hero!

4. Backtesting Power

Have you got your trading strategies in place? Performed past data analysis? Did your strategies work well for the past data? Feeling too much burden? Well, you don't have to do it all by yourself. Most trading bots offer back testing features, allowing you to test trading strategies against historical data. This is a great way to check how your strategies would work in different market scenarios and whether your strategies need some work.

5. Diversification

Just like forex trading, it is suggested to trade across multiple currencies and not put all the eggs in one basket, the same rule should be followed while trading crypto. Using multiple trading bots can help diversify your portfolio across various cryptocurrencies and strategies. This approach helps you spread your risks and allows you to take advantage of different market conditions, therefore increasing your overall returns.

Best Practices for Using Crypto Trading Bots

1. Choose the Right Bot Through Proper Research

Don't go for any available bot in the market. Research is important when selecting a trading bot. Look for reputable options with positive user reviews and robust security measures. It needs to be fast, accurate, and user-friendly. Ensure the bot aligns with your trading goals and offers the features you need.

2. Begin With a Demo Account

When trading, always trade on a demo account first. Why so? It is a healthy trading practice that will help you double check your trading practices before putting any real money at risk. Demo accounts will also help you understand the functionality of the bot. Make yourself your bot’s best friend and then shift towards trading with real money.

3. Be Clear About Your Trading Objectives

Be sure of your trading goals before commencing trading. Different goals demand different actions. Decide whether you want to place short-term or long-term trades. This will guide your trading practices. 

4. Ensure You’re Implementing Proper Risk Management

Implement proper risk management practices while trading, such as stop-loss and take-profit orders. This will help you exit the trade when your pre-set price is hit. Without such measures, a trader can face unlimited losses. Stop-loss orders help you exit the market as soon as your pre-set limit is hit. Take-profit orders help you exit the trade as soon as your expected profits have been earned. Trading bots can help you set targets for your stop-loss and take-profit orders.

5. Keep a Check on Your Performance

Bots should assist your trading practices; they should not be used to trade entirely on your behalf. You need to check your performance on a regular basis. This will help you track your growth and will also assist you in modifying your trading strategies.

6. Stay Informed About Market Trends

The crypto market is influenced by many global factors. It is important to know about the market trends so that you can adjust your trading practices accordingly. Stay updated on market developments to make informed decisions and adjust your bot’s settings accordingly. Use Equitio’s cryptocurrency calendar to know what’s happening in the crypto world. Stay ahead of others by keeping your knowledge updated.

7. Always Test Your Strategies Beforehand

Do you buy any shoes without trying them on first? No right? It is because you want to be sure of it before spending real money on it. Similarly, while trading, you should always test your strategies on past data to understand if your strategies require any work. Once you’re sure that your strategies have worked well on the past data, then you can put your real money at stake.

8. Be Patient and Sincere

All trading markets are unpredictable, as there is always so much going around the world. Somedays all your trades will work in your favor, somedays none will, and that is okay. You should be consistent and should learn to manage your emotions. Don’t be prey to extreme emotions such as fear, greed, or overconfidence. Keep learning to improve and enhance your trading knowledge, every single day.

Potential Pitfalls with Crypto Trading Bots

1. Market Volatility

Trading markets are known to be volatile. In situations when the market is too volatile, bots are capable of executing the set order without fail. Bots don’t have a brain of their own; they are like robots who are doing tasks that have been assigned to them. This acts as a drawback while using trading bots.

2. Technical Issues

Bots are a form of technological advancement. It has been programmed to make traders’ lives easy. But, just how humans fall sick, even bots face errors sometimes. There are times when they don’t function properly and that leads to the occurrence of losses. This can happen when bots fail to execute the set orders.

3. Over-Optimization

Based on past performance, traders can be tempted to over-optimize the parameters of their bot. Backtesting is important, but over-optimization might result in methods that work well in simulations but not in real-time trading. Traders should test what would work the best in present market conditions. The set bot rules should be achievable and realistic. It shouldn't be too good to be true.

4. Security Risks

Like they say, prevention is better than cure and when there is money involved, traders should be extra careful. Bots should be used from a reliable and trustworthy source so that in no way traders become a prey to scams.

5. No Human Element

A bot is a technological tool, it doesn’t have a brain. Humans can keep increasing their knowledge throughout their lives. In a trading context, traders can derive market knowledge by doing market research. They can do their homework and stay updated. But, bots don’t have the bandwidth to do so. They are made to only take and execute the instructions that are given to them. Bots don’t do any analysis work and they don’t have a brain of their own. Hence, traders cannot be entirely dependent on bots in situations where there is a sudden market shift or situations that cause massive market movement.

Key Takeaways

Crypto bots have a lot of perks, but they also come with certain cons. You can use bots to your advantage by being mindful of the benefits and drawbacks that come along with it. Adopt a practical approach while using this technology. Ensure that bots are a part of your trading plan, not your entire plan. Use bots to enhance your trading game but always exercise caution as well!