Related Definitions

Crypto Trading Bot

What is crypto trading bot?

A cryptocurrency trading bot is a program that enables quick online trade execution and positioning. They try to automate trading. It has a set of instructions on when and how to take trade positions for cryptocurrencies. Crypto trading bots address the difficulty caused by the volatile nature of crypto markets. Changes in prices are rapid and challenging to time minute by minute. Optimising trades with bots allow crypto investors to achieve the best trades.

  • Crypto trading bot is a software program enabling easy, efficient and effective cryptocurrency trading.
  • They address the difficulty of timing the volatile crypto markets.
  • Crypto bots can help identify trends, arbitrage opportunities, etc., for profitable trading.

Frequently Asked Questions (FAQ)

How does crypto trading bot work?

Cryptocurrency exchanges allow API interaction, meaning users can pull data and make specific changes to accounts using a software program. Such programs which automate the trade on a cryptocurrency exchange are called Crypto trading bots. Users of trading bots can therefore execute a predefined trading strategy or even create one.

Almost all crypto trading bots follow three common steps-    

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Signal generation- It happens when the condition specified in the program meets and a buy or sell signal pops up. Likewise, if any trading strategy is specified, the signal will pop up if all conditions meet.

Risk Allocation- The next step is deciding on buy-sell quantity. Here the type of trade order is also decided.

Trade Execution- It is about getting all trades executed in one go at favourable trading conditions. Single order execution takes lesser time.

Creating these steps in a trading bot means writing separate programs for each and interlinking them successfully.

What are the various types of cryptocurrency bots?

Cryptocurrency bots are generally of the following types.

  • Trend trading bots work on the market trend of a crypto asset and execute trades accordingly. In simple terms, a trend trading bot will take a long position if the price is on an upward trajectory. Otherwise, if the asset is showing bearish trends, it will be short on such asset. The trend prediction work on price movements, moving averagesand other technical pointers.
  • Arbitrage bots are used for arbitrage, meaning synchronised buying and selling of an asset in different markets or crypto exchanges. Traders use them to obtain profit from price differentials.
  • Coin lending bots are used to lend coins for margin trading, which returned with a margin on loan. Such bots reduce the efforts needed to set new parameters when margin traders return the money and new loans are arranged.
  • Market making bots place orders priced over or under market price, making a market and earning from it. These help in creating wider spreads for traders by increasing order book activity. They tend to benefit from price fluctuations.

Are crypto bots legal?

Bot trading is legal for cryptocurrency exchanges as well as stock markets. That being stated, anything that is prohibited in regular circumstances is also illegal in bitcoin trading. After all, these are just software codes allowing automated trading. The software is tested and does not allow any malicious attacks on the exchange. The essential purpose of the existence of crypto bots is to make cryptocurrency trading easy, efficient, and effective. All they do is exploit market conditions and trading strategies to generate profits.

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What are benefits of crypto trading bot?

Crypto trading bots offer the following benefits in trading.

  • Better accuracy of trade is achieved as the program works on rules. It entertains no personal biases.
  • Bot strategies can be adjusted as per the needs of traders. The only requirement is program alteration.
  • Bots can work 24x7x365 and don't get tired like humans. All trade days can be explored without fail.
  • The capacity to identify, understand and execute trades is much more than humans.
  • Trades are executed based on data and trend available, making somewhat foolproof.
  • The best part is they allow automation and save on time and repeated efforts of humans.

What are the drawbacks of crypto bots?

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Like any other program, crypto trading bots can also have glitches.

  • Bots may not be able to identify opportunities outside the pre-specified conditions.
  • Fault in one part of the design can make the entire program fail, leading to a loss in trading activity.
  • To be able to use bots well, one needs to know cryptocurrency and software programming.
  • Trade strategy translation into the program can often not be error-free due to testing is required before actual use.
  • Bots can be costly and may therefore become unprofitable for a crypto trader looking for meagre daily margins.
  • For bots to run, computers or other devices need to run. Hence it is not a very energy-efficient method.

How to pick good crypto trading bots?

There are many crypto trading bots considered best by traders like Cryptohopper, Pionex, Coinrule, eToro, etc. Given the above pros and cons, one should choose a trading bot well. Following factors can be considered before choosing a crypto trading bot.

  • Professional expertise of developers or creators of bots must be considered.
  • Reliability of algorithms used in the trading bot. Usually, trading bots use advanced algorithms.
  • The trading bot program should have been well tested, and popularity or user feedback is one way to know this.
  • Flexibility of algorithms can also be considered before choosing a trading bot. It is essential to make changes to the trading strategy.
  • It should be able to interact with multiple exchanges and not be limited to just one.
  • The cost of the crypto trading bot is another important consideration before buying.
  • The bot should have an excellent interface to enable faster transactions and order execution on the exchange.
  • Not just that, the user interface should also be easy for beginners and well-versed traders.
  • Another factor that traders can look at is high volume trade execution.

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