Individual traders and organizations are looking for ways to automate their trading activities and outperform the market. Investment banks and hedge funds are looking for the smallest of opportunities on US Stock exchanges to place large automated orders faster than the time humans can react to. As per recent statistics, 92% of forex trading and 75% of stock trading on US Stock Exchanges are automated and performed via algorithms or bots. The popularity of automated order placement is rapidly increasing in the cryptocurrency markets and crypto trading bots are becoming a hot topic amongst the millions of traders as they look to react to market movements faster than humans can.
If you are going to be trading, a bot can undoubtedly help. But you might want to read our article on the differences between trading and investing before you start setting up your bot.
If you have decided to start day-trading and to go up against armies of professional traders with the awareness that 80% of retail traders lose money, this guide will answer the questions you have on crypto trading bots ranging from how they work, their pros and cons, some top examples. And if you don’t feel comfortable using crypto trading bots by the end of this guide, we'll show you some alternatives.
Crypto Trading Bots explained
A Crypto trading bot is a set of algorithms - software - designed to automatically place trades on your behalf. As a trader, you may be sleeping and your bots will trade on the crypto exchanges and place orders based on the signals you have told them to watch out for.
Bots make use of Application Programming Interfaces (APIs) to collect information from the order books of the crypto exchanges. Nearly every cryptocurrency exchanges provide their APIs for algorithmic trading as these automated trades, being high in frequencies, work as a great source of revenue for the exchanges which earn a percentage transaction fee on every order. The house always wins.
Your bots can place any type of orders like limit, stop-limit, or market placing actions of buy, sell, or hodl based on the pre-established parameters. The parameters can be as simple as buying Bitcoin when it goes below x% and selling when it rises above y% (where x and y can be any 2 numbers as per your analysis). The complexities may be taken to a next step where bots can evaluate technical indicators like Moving Averages (MA) or Relative strength index (RSI) and place orders based on the conditions set on technical analysis (TA) indicators, and there are plenty of such signals, some used by many, some proprietary.
Working of a Crypto Trading Bot
You can start by setting up a team of developers to set up your trading bots from scratch or download the publicly available bots in the form of browser extensions, software, apps, or line of codes directly from developers who published them on GitHub. Every trading bot will need access to your exchange API Public Keys and API Private Keys. Access to API keys will also inform the exchange that your exchange account is now accessed by a bot after your authorization. Usually, top exchanges have API documentation that can guide you on how to use their APIs in a safe and secure environment. You can set API Key’s settings to allow the bot to trade and collect data like market prices, balance, and other relevant information from the exchange. Don't make those keys available to anyone else, don't put them in emails, don't save them in folders on your computer, as anyone with access to those will be able to take all your money on the exchange.
Trading bots work in 3 steps after their data requests submitted to exchanges have been fulfilled:
This is the step where the data is fed into the generator and the actions come as output from the other side after analysis of data and Technical Analysis indicators. These outputs are generally ‘buy’ and sell signals.
In this step, the bot decides the amount and volume of the order and distributes the risk based on the rules set by the trader.
Now your data is analyzed, action is pre-decided, what is left is only to execute the trade.
Based on the interpretation of this information and a predefined set of criteria or parameters like percentage change due to price movements, volume, current orders (depth of buy and sell orders), and timings, the bots react and place buy and sell orders on the exchanges as per your instructions.
If you give it bad instructions, it will make bad trades.
Crypto Bot Trading Strategies
Your crypto trading bot needs to have a trading strategy on which it can act consistently. Your strategy can be categorized into the following types:
- Your bots can capture the asset’s trend based on past data and act based on momentum. These bots usually capture small profits and prevent losses by placing stop losses.
- Arbitrage bots can monitor the minor differences between the prices of tokens in different exchanges and place quick orders to take advantage of this gap.
- Vastly popular in the traditional finance industry, market-making bots reduce the difference between the buy and sell price by capitalizing on the bid-ask spreads on the exchanges and running orders in bulk.
- Grid Trading means placing a series of buy and sell orders back-to-back. As soon as the buy order is executed, the bot will place another sell order at a higher grid and vice versa (buy followed by sell) on a lower grid.
- Last is the type of bot which acts on TA indicators and performs reverse strategies when price numbers on indicators traverse past indicators like Exponential Moving Averages.
Advantages of Crypto Trading Bots
Crypto trading bots bring several advantages.
- They are fast: No human on this planet can conduct millions of computations and place thousands of orders within seconds.
- Bots are not driven by fear or greed. Bots will not panic sell when the markets turn bearish or start touching new lows. They will stick to your trading strategies throughout.
- Crypto markets are open 24 hours, 365 days a year so will be your bots. You need to sleep.
- Crypto Bots are pinpoint precise. Take an example where you ran a correlation analysis between Bitcoin and Ethereum and you decided to sell Ethereum when Bitcoin hits an "All-Time High" (ATH) of $60,000 because, usually, altcoins dip when Bitcoin reaches new ATHs. By the time you see your BTC price alert, log in to the trading app, and place a market sell order on ETH/USDT pair, the price of ETH and BTC have changed. This will not be the case with trading bots because the bots will execute your orders based on its signals at the exact point it was programmed to.
Disadvantages of Crypto Trading Bot
There are a lot of factors that influence prices and that can't be understood by looking solely at price changes. Best you don't leave it all up to the bot if it can't read Elon's tweets.
Also, the slightest of programming errors can result in huge losses if you leave your bot unsupervised. There are more than hundreds of crypto bots available in the market and thousands of signals, and most are unprofitable. Especially if you are programming your trading bot from scratch, run it on test environments in the beginning and stress test them with small amounts on the exchange platform to reduce the error rate.
Bots require an unstoppable power supply, network connection, and hardware configurations to run effectively. Shortage of any of these 3 can stall the process.
Trading bots require extensive knowledge of crypto markets with well-structured planning to utilize a bot only as per the planned strategy. Do not use bots unless and until you are confident. Crypto bot security is crucial and any flaw or bug in your bot’s code might result in loss of your funds. To start with, remove any type of withdrawal permissions from your trading bots. Keep your API keys secret. Do not share them with anyone as they are a direct access point to your exchange account’s information.
Most trading bots available on the internet use the same signals for trading. If you can't find an original trading strategy for your bot, your odds aren't great.
Examples of Crypto Trading Bots
Cryptohopper is one of the leading crypto trading bots available in the market. The bot helps users of all levels and is relatively beginner-friendly. The bot is expected to add market-making and arbitrage trading to its bot in the future. Currently, it runs beginner-friendly trading strategies which are optimized for the errors human emotions make a trader do in their trading journey. The company has also created Hopper Academy, a playlist of videos for users to learn how to use their platform and the bots. Traders do not need any programming language to start using their bots. Cryptohopper provides you with a free dashboard area to monitor your bot’s activity across various exchanges. The bot is capable of taking advantage of technical analysis indicators like RSI, Bollinger bands, MACD, and Stochastic Oscillators. Which every trader is looking at so you'll likely do better if you inject some originality.
Founded in 2018, 3Commas has developed a smart trading terminal and advanced automated trading bots. 3Commas is more popular among experienced traders due to its advanced trading algorithms and copy-trading strategies. Copy-trading allows you to copy the trades of experienced traders. If you trust them, it's a good way to follow along. The bots on 3Commas can be categorized into 4 categories:
- Short bot
- Simple bot
- Composite bot
- Composite short bot
3Commas supports almost all the leading cryptocurrency exchanges, including Bittrex, Bitfinex, Binance, Bitstamp, Kucoin, Poloniex, HitBTC, CEX.io, and Coinbase Pro.
Haasbot is developed by Haas Online Software, a company founded by Stephan De Hass in January 2014. Haas Online Software is one of the most experienced crypto trading bot developers.
Haasbots are available for Windows and Linux users with no restrictions to the number of altcoin pairs they can be used for. The bot can utilize more than 50 Technical Indicators to make its trading decisions. It also supports paper trading, backtesting, reporting, and notifications.
All of their bots are fully programmable written in the C# programming language. Currently, the trading bots support 12 leading exchanges which are Binance, Bitfinex, BitMEX, Coinbase Pro, Gemini, Huobi, Kraken, Kucoin, and Poloniex. The pricing of Haasbots is on the higher side which ranges from 0.04 to 0.07 BTC for 3 months.
Although Zignaly is a relatively new company compared to its competitors, it has still managed to build a trading terminal with crypto trading bots that can be accessed for just $12. Based out of Madrid, the company was founded by David Coronado and Bartolome Bordallo in 2018.
Zignaly provides the ability to trade unlimited crypto pairs, place stop-losses, and react based on the signals provided by third-party experts. Zignaly can be easily connected to your TradingView account if you want to stay in a familiar environment.
Currently, Zignaly is fully integrated into Binance. With the launch of its full-version, Zignaly is looking to expand its integrations with other exchanges like KuCoin, Coinbase Pro, Poloniex, and Bittrex.
Alternatives to Crypto Trading Bots - OSOM Crypto Autopilot
By now you might have decided to go all-in on trading with bots, or that you would rather invest than trade, even with a bot. Either because you don't know how to code a bot, what signals to look out for, or because you think the exchange fees are going to eat all your profits.
If you decide trading is not for you, there are other alternatives also available in the market which can invest on your behalf. You don’t necessarily need any programming, technical, or basic understanding of cryptocurrency and blockchain. These tools can help you invest, and all they require is a registration and for you to put some euros on your account. One such tool is the Crypto Autopilot by OSOM Finance.
OSOM’s Crypto Autopilot analyses several months of past price data to build a portfolio for you for the long term. It doesn't trade, it invests. The Autopilot tracks more than 200 cryptocurrencies. It is designed for safe and efficient investing keeping reduction in risks as their primary objectives. http://bit.ly/OSOMPerfBenchmark
OSOM’s Autopilot is the most beginner-friendly investing algorithm for new investors. If you would have bought on day 1 (26 September 2019) and stayed in Autopilot the whole time to 23 March 2021, you would have seen 932% returns on your investments. What you did from your side is just deposited funds and all the remaining work was done by the Autopilot. And it didn't do this by trading frequently, scalping profits, or taking short positions. It did it all through the building of a well-diversified investment portfolio.
It is not on us to decide if you should invest or trade, but we hope this was useful in helping you reach the right decision.
Do be mindful that the crypto-trading space is seeing more and more very experienced professionals and teams move in, and that "lone traders" with little experience don't really stand a chance against teams of mathematicians with supercomputers.
If you do decide to trade, when choosing your companion crypto trading bot, get your questions answered concerning the security, transparency, reliability, and efficiency of the bots as well as their developers. No trading bot is perfect for all traders. And as always with your money, if you don't understand the bots and their applications, it might be better to look for alternatives.