A Guide to How Crypto Trading Bots Work

The internet has changed the financial landscape forever. It hasn’t just changed the way we do business online, it’s changed the very nature of financial currencies. In the start, most people thought little of cryptocurrencies and some considered them nothing short of a niche. However, the technology (blockchain) used to create cryptos has also proven itself to have multiple applications that could even change the way we use the internet in terms of business and communication. Of what there certainly can be no doubt about is that cryptocurrencies are here to stay. In the world of finance time waits for no one and when you factor in the volatility of the financial market, then if you are going to profit, you need to act fast. Of course, the implication here is not that one should make rash decisions, but that in order to act fast, you’ll need a safe, calibrated and reliable strategy. Due to the fact that cryptocurrencies trade 24/7, the ability to stay abreast of market fluctuations and all that it entails can prove challenging to say the least, which is where crypto trading bots come into the picture.

What is a trading bot?

Quite plainly put, a bot is nothing more than an automated program that handles mundane, yet important tasks. In fact, it’s been suggested that half of the internet’s traffic can be attributed to bots and the various functions they conduct online. Crypto trading bots operate in a very similar manner in that they perform certain functions through the integration of artificial intelligence and preconceived parameters. With a crypto trading bot by your side, you can free yourself from the arduous task of constant monitoring and instead let the bot attend to buying, selling and holding at any time and from anywhere. If an actual crypto company like Bitcoin, Ethereum, Cardano or Dogecoin experiences fluctuations, then investing in crypto companies such as these at just the right time is something that the bot can execute.

How do these bots actually work?

While an automated crypto bot will do all the work, it should be noted that your interaction will still be required. You’ll still need to key in your limits, trading requirements and parameters, but thereafter the bot will do the rest. By way of direct communication with crypto exchanges, the trading bot will provide you with efficiency, speedier decisions and executions, and fewer errors thanks to the removal of emotional or psychological elements. There are three main ways in which trading bots work, and they are as follows:

• Signal generation: This entails what is known as the signal generator, the part of the bot that does the work of the trader.  It makes predictions and identifies potential trades based on technical analysis indicators and market data.
• Risk allocation: This mainly comes down to how much money you’ve set aside for your trade endeavours. In terms of risk allocation,  the bot determines how much capital to allocate when making a trade, based on rules and parameters keyed in by the trader.
• Execution: As in indicative of the term itself, this is when the action happens.  It is at this stage that cryptocurrencies are bought and sold according to the pre-configured parameters and signals. The signals are then converted into API (Application Program Interface) requests which the crypto exchange is able to comprehend and execute.

The benefits of crypto trading bots

So, why bother with an automated trading bot? Well, for a profit of course. It’s been suggested that up to 80% of trades that occur on the stock market are done through automation programs. For private traders, it’s a bit of a different story due primarily to costs. This is not to imply that these bots are unaffordable. In fact, there are quite a few crypto trading bots out there that can be gotten for a nominal fee, the benefits of which are:

• Emotionless trading
• Faster trading speeds
• Tests and simulations
• Risk diversification

The volatility of trading in cryptocurrencies means that your emotions can flare-up. An automated bot can largely solve this problem and save you money. When it comes to the execution of a trade, bots are simply faster. Bots allow you to use historical data and run simulated tests which in turn can help you to plot your strategy more effectively. With multiple trading bots you can implement a risk diversification strategy and cut potential losses.