Automated crypto trading systems are simply trading strategies created with the use of algorithms which execute trades on auto-pilot based on predefined rules.
These mechanisms can be deployed in all areas of the financial markets. With its first appearance in the stock market and forex trading, the success and easy applicability of the system has made blockchain developers adopt it for cryptocurrencies and digital assets.
If algorithms can be used to program complex models like automated market makers, which provides a market without the traditional centralized market makers, then algorithms can also be adopted to trade on any financial market, centralized or decentralized.
Using algorithms, automated trading systems allow a user to enter a precise market position, exit trades based on the current price of the asset and market indicators that have previously been designed in the automated market strategy selected by the user. The requirements for making automated trades in exchange platforms are just a computer and an account with a trading bot company.
Trading bots are the link that places trades on your behalf based on the required market strategy. They buy and sell bitcoins and other digital assets based on the variables of the software without you being concerned about monitoring your computer or rushing around to close trades at specific times. These trading bots work as APIs that act as the intermediary between you and your preferred exchange.
APIs are a set of programming code that queries data and transmits information from one software to another. Application Programming Interfaces are used in financial trading to create a direct link between the user's exchange platform and a set of automated trading algorithms to enter trades or buy and sell cryptocurrencies on the exchange on behalf of the user. Without APIs, there would be no automated trading on any platform as there will be no link to convey the algorithm to open trades and take profits. Most brokers and exchanges are now developing their API which would directly make automated trades for users on their platforms rather than going through third parties.
Recent updates have come in DeFi automated trades. Decentralized crypto trading platforms are more secure in using automated trades systems because it is registered directly on the blockchain. It works without API but with blockchain solutions and smart contracts to execute and exit trades based on the algorithms given to it. Automated trading has been likened to a copy trading feature on most exchanges.
If you don't want to invest in holding coins long-term, then this trading pattern suits you perfectly as algorithms handle the daily buying and selling of coins. Technology makes life easier so automated crypto trading systems have a lot of advantages for the user and the market. Some advantages are;
This simply implies that traders can check the viability of an idea through comparison with historical data of the financial markets. Automated crypto trading systems make use of backtesting to form market strategies that will be used as principles to enter automatic trades for the user.
When designing automated trading bots, all the trading rules which are gotten from historical data must be absolute as the computer acts on the data given to it exactly as it is. Users can take these automated trading patterns and check their viability through historical data on the market and ascertain whether or not it is a good model. Traders can decide to follow the model to manually trade by themselves or just flow with the automated algorithm.
This pattern also enables traders to calculate the expected profit they are to expect from automated crypto trading platforms. With backtesting, users are certain if a particular trading strategy can beat the market.
Automated crypto trading systems allow the user to trade multiple accounts with different strategies at once which is impossible with regular human trading patterns. It spreads the risk over various assets while automatically hedging against losing positions. All this is done by the computer which automatically searches for trading positions in different instruments through the algorithm.
Crypto trading bots are advanced algorithms that can execute trades much faster than humans. As a result, trades are executed with precision on the exact value that was intended on the trading algorithm.
Trading bots can buy and sell digital assets faster to avoid slippage. Slippages are a defect of human trading that occurs as the difference between the expected price of a trade and the actual executed price of the trade. As crypto trading is a very volatile market, slippages easily happen. Algorithmic trading puts an end to these slippages in the system.
One problem traders always have is letting their emotions get in the way of trades. This problem is non-existent in electronically generated trades as crypto bots handle the trading. Due to the high volatility of cryptocurrencies, it becomes very difficult for traders to stay disciplined but algorithm executed trades will execute hundreds of trades per second while strictly following the instructions given to them.
Emotion-based trades are brought to zero. Once the criteria are met on the market, the bots automatically enter the trade and permanently eliminate uncertainty, fomo or FUD. The bot sticks to the instructions given to it.
Bots are a million times more consistent than humans. This also applies in trading as they can do one thing over and over without slowing down provided the market conditions are met. These bots trade 24 hours a day so they are very effective tools to capitalize on the market.
With crypto trading bots, users don't have to look into their screens every time of the day. They just register, select trade patterns and let the algorithms do the trick. Most people find blockchain and crypto knowledge very complex.
With automated trading systems, they can invest in the crypto market and make profits while not directly handling their trades.
As brilliant as the idea of automated crypto trading systems may sound to the average trader, it still has its setbacks. With new developments in blockchain, new technologies would come to remedy most of these setbacks. These disadvantages include;
As much as automated crypto trading involves the use of bots and a precise algorithm, it still needs to be monitored by the user to check if market trends have changed which are now different from what the automated system is using to execute trades.
The volatility of crypto markets coupled with power issues and network crashes depending on the location of the user are part of the reasons why it should be monitored. Mechanical failures of some software may also lead to losses for the user if the system isn't monitored frequently.
Using crypto trading systems is usually characterized as safe, especially the DeFi model hosted on the blockchain and executed with smart contracts. However, it is still susceptible to security breaches due to hacking.
The use of crypto bots requires funds to be held on the exchange which can be hacked. For the protection of funds, a hardware wallet should be used. Larger and more advanced exchanges are more secure than others.
This disadvantage doesn't apply to all automated crypto trading systems as some platforms now explain in layman's terms. As it stands, however, most platforms that allow you to create a bot from scratch require some coding knowledge - normally Python. You can read more about building trading bots with Python in this article.
The various trading techniques and strategies for the user to choose from are too technical for the users to understand. The users may end up selecting randomly and it would lead to losses. Experts are the biggest gainers of automated trading systems and the status quo will not change anytime soon.
This occurs when the strategies created by backtesting look perfect on paper but flops in the live markets. Excess curve fitting is good for only theories as in live trades, it would be practically unreliable.
Traders should never assume that a trading plan gotten through the gathering of historical data would lead to 100% profits as the crypto market is highly volatile and anything can happen.
There are a number of pros to automated trading and the cons are being improved by developers to create the systems that work flawlessly. Users can still trade through manual trading if they are not fully convinced about automated crypto trading systems or they can make the switch to start trading with bots. Some platforms, like Trality, offer free accounts and virtual trading where you can build your own bot and run it on a virtual exchange to see how it might perform. This might give you a better understanding of how effective bot-trading is.
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