Crypto never sleeps. But traders do. To overcome the limitations of human endurance, automated trading systems that can execute orders around the clock have been developed. But these automated solutions, also known as bots, are about much more than letting overworked traders take some shuteye.
As computer code, bots can execute strategies more sophisticated than any human brain. They can’t fatigue, need no breaks or days off, and are more reliable than even the most dedicated traders. No wonder they’re taking over crypto trading, helping shrewd operators maximize profits.
The Rise of Automation
Automated trading software has been a staple of stock markets and Forex for decades, but it’s taken longer to gain a foothold in crypto. As the cryptocurrency market has matured, however, and professional trading firms and Wall Street veterans have entered the fray, they’ve brought the tools of the trade with them. At the same time, crypto-native developers have been working on their automated trading solutions, from rudimentary bots to advanced platforms that support an array of complex order types.
Today, the crypto market is powered by automated trading software, including DCA bots, copy trading, AI-powered algorithmic trading tools, and professional solutions for high-frequency trading (HFT). While the nature and design of these solutions vary greatly, each product shares the same two fundamental goals:
- Generate greater profit
- Drive greater efficiency
Since time is money (at least to those who value their time), these objectives go hand in hand. Automation is ideal for handling repetitive tasks, and few constructs are more repetitive and thus predictable than financial markets.
How Trading Bots Work
On any given day, a market will rise and fall by a given percentage, with each high and low that appears on the chart presenting a buying or selling opportunity. A trading bot is essentially a program designed to capitalize on these price movements by executing buy and sell orders over and over with the goal of generating profit for its operator. It sounds simple, and at a high level, it is, but the making of a profitable bot lies in the details.
Consider a daily BTC/USD chart starting the morning at $38,000. By mid-afternoon, BTC is trading at $39,500 and, by evening, has settled at $39,000. With hindsight, it’s easy to say that a bot that bought in the morning and sold in the evening would have netted a profit. But markets aren’t predictable, and thus, bots aren’t that simple to code.
The creation of automated trading software that can outperform humans and accrue positive PnL requires extensive research, design, and backtesting using empirical market data. Automated crypto trading software can only beat the market through refinement and optimization, whether that market consists of people, other bots, or a combination thereof.
Automated Trading in Action
As noted earlier, automated trading solutions vary significantly in design, even if their ultimate goal of greater profitability and efficiency is consistent. So, what are the most popular trading bots? While this list is by no means exhaustive, these are the crypto trading bots you’re most likely to encounter:
DCA Bot: To dollar cost average (DCA) is acquiring a particular asset through a series of time-delayed purchases at different price points. By DCA’ing, the buyer doesn’t need to sweat over their entry price since it will work out at the average market price over the purchasing period. A DCA bot implements a more sophisticated version of this strategy, using market indicators to gauge opportune buying and selling points.
Arbitrage Bot: These bots take advantage of price discrepancies between different platforms. For example, when a large trade is executed on a DEX, there is a certain amount of latency before the new price is reflected on other DEXes and CEXes supporting the same asset. Arbitrage bots rebalance market prices while earning a profit for their operator in the process.
TradingView Bot: There are different names used for this type of bot, which is designed to execute trades based on the user’s preferred trading indicators. When a predefined set of conditions are met – e.g. BTC is above its 200-day moving average – the bot can trigger a trade. Experienced users can create TradingView bots that incorporate multiple indicators and that support trailing orders, hedging, and other advanced strategies.
In addition to trading bots, there’s another type of automation that’s become popular in recent years, particularly among amateur traders: copy trading. Today, there’s a thriving market for copy the trades shared by professional individuals and groups automatically A number of platforms, including exchanges as well as automated trading terminals, provide copy trading features that allow beginners to emulate pros, and for the pros to be rewarded for the alpha they share.
Select a trader whose win rate or strategy you like, activate the automation, and it’ll start mirroring their trades, giving you exposure to the same assets, entry, and exit points. Copy trading can be found on exchanges that support this feature and is also offered by automated trading platforms that connect to exchanges by API and typically offer other trading bots too.
No Code, No Problem
In the past, automated trading called for good technical knowledge to make the modifications required to customize a bot. Familiarity with a command line interface and basic coding skills were a definite advantage. Today, the commoditization of automated trading has obviated the need for getting your hands dirty just to spin up a crypto bot.
The best automated trading platforms offer a drag and drop interface or simple dropdown menus that make it easy to create a custom bot based on different filters and variables. There’s still a degree of skill required in picking the right bot for the job and optimizing it for the task at hand. Once activated, however, a good bot will faithfully ply its trade day after day, freeing its operator from chart-gazing and order book-observing.
For sheer efficiency, a good auto crypto trading solution can’t be beaten. Traders willing to spend some time researching the best bot providers on the market will be recompensed for their efforts. After experimenting with crypto bots, manual trading feels almost quaint. The future is automated.