Introduction to Crypto Trading Bots
These are automated programs that use machine learning and other types of algorithms to perform transactions. Crypto trading bots are used for selling and buying cryptocurrencies based on defined criteria to generate profits.
These bots process the information regarding digital currencies such as price, trading volume, timeframes, and orders. Bots analyze virtual currencies based on specified trading strategies and parameters and calculate the right transaction to complete the trading objective.
How Do Crypto Trading Bots Work?
Crypto trading bots measure the viability of a given trade based on the parameters, indicators, and goals that are set for them. These parameters are predetermined in their programming and the bots pick from the range of trading strategies that are added to its analysis unit.
Trading strategies for bots can range from simple indicators such as relative strength index, moving average and Bollinger bands or more complex parameters.
Bots access these trading parameters to measure the outcome of a probable transaction to complete the predefined goal. Therefore, trading bots are more autonomous in comparison to features such as stop-loss.
Bots can perform digital currency trading using a simple indicator named Moving Average Crossover. This indicator references two moving averages namely fast moving average at 10x and slow moving average at 50x.
The period for these MAs can be minutes, days, weeks, months etc. The buy period starts when fast moving average fairs above the slow moving average and vice versa. Traders can configure the parameter in a trading bot for a given cryptocurrency as under:
If 10-period moving average is greater than the 50-period MV, the bot should purchase the virtual currency.
In case the 50-period moving average is above 10-period moving average, it should sell the token.
Now the parameters have been set, the bot will start monitoring the price of the cryptocurrency. At the same time, the bot will collect data for both 10x and 50x MAs for the coin and analyze them.
Whenever, 10-period MA is greater than 50-period MA, the bot will automatically sell the cryptocurrency. However, if the 10-period MA is lower than 50-period MA, the bot will purchase the underlying digital coin.
Trading Parameters for Crypto Trading Bots
This strategy takes advantage positive or negative trend lines. The bot is going to measure the tradability of a given coin based on uptrend and downtrend.
Mean reversion measures the probability of the price of a given asset returning to its average value with respect to time. Bots will accumulate if the price remains closer to the mean and sell when otherwise.
Arbitrage is leveraging price differences for cryptocurrencies that are listed on different markets. Bots in this case are connected to multiple exchange platforms and monitor the price fluctuations for a given token. Bots buy from platforms with smaller prices and sell them to the tokens on platforms where prices are higher.
Market-making bots purchase and sell crypto coins based on the bid-ask spread. They are suited for lower volatility and high-volume cryptocurrencies.
Scalping is HFT method that leverages small prices changes. Therefore, the bot has to make fast transactions at a scale that can be difficult for human day traders to emulate.
When crypto prices move out of support or resistance range, it can continue to move in that direction. Bot monitors the support and resistance levels based on indicators to determine the price direction and place their trades based on these ranges.
Momentum trades purchase assets when they are moving in the bullish direction and sell them at reversal. Bots can use RSI or MACD to project prices movements.
When the current trend of a crypto coins is about to reverse, investors can place their bets accordingly. Therefore, bots can view the technical pattern and indicator.
Bots can also analyze the news and social media trend to look for information that is most suitable regarding the price movement of a given cryptocurrency. Bots can also use market sentiment to determine if the price of a given coin is going to rise or fall.
Dollar-Cost Averaging (DCA)
Dollar-Cost averaging or DCA is the process of accumulating more digital currencies over time at regular intervals. Bots can perform DCA trades in an automated manner.
Crypto trading bots offer important advantages to the investors such as removing psychological bias, automation, faster speed, error-free technical analysis, back-testing, and robust risk management. They can also pose risks such as volatility, complexity of operating, and security issues.