Cryptocurrency trading bots may sound like something out of a science fiction movie to those who are new to the crypto asset markets. However, once you understand what they are and how they work, you will realize that they can be a useful tool to have in your trading arsenal.
What is a Cryptocurrency Trading Bot?
A cryptocurrency trading bot is a computer software that uses different market indicators to detect price trends and then automatically executes trades based on predetermined settings on behalf of the trader.
Algorithmic trading programs have historically been used by hedge funds and proprietary trading desks in the commodity, currency, and equity markets. However, trading bots have recently also made it into new finance as more and more crypto traders are using bots to execute their trading strategies.
In simple terms, trading bots allow you to set specific parameters – usually based on technical analysis and sentiment indicators – at which the bot executes trades for you. For example, if three of your chosen technical indicators show a buy signal, the bot will automatically buy for you and when the indicators show a sell signal, it will sell.
Trading bots are thus tools that more experienced traders can use to execute their trading strategies without physically having to push the buy and sell button. They also help to take emotions out of the equation as they are based purely on price action.
Risks of Using Trading Bots
Before using trading bots in the crypto asset market, there are three key risks of which users need to be aware: scams, weak software, and flash crashes.
Firstly, there are a substantial number of scams in this area. Any trading bot software that promises to be a passive income-generating trading software is going to turn out to be a scam. These need to be avoided at all costs.
Secondly, not all trading bots are of the same quality. If the software has any faults or coding errors, it could execute unwanted trades on your behalf, which could lead to a financial loss. Since the trading bot executes automatically for you, you will need to be able to trust that the software will do as you have instructed it to do. However, that may not always be the case.
Thirdly, flash crashes – such as the ETH crash on GDAX in June 2017- could lead to steep trading losses if you have a trading bot set up to automatically execute trades.
As the above-mentioned risks show, it is best not to put too much money into bot trading as both the market and the trading bot sector are still in a relatively early stage in the cryptocurrency space, meaning that problems can easily arise with these trading programs.
Should You Use Trading Bots?
Trading bots are definitely not something for beginners. They should only be used by experienced traders who are able to dedicate a substantial amount of time to constructing, backtesting, and applying automated trading strategies into their overall cryptocurrency investment approach.
However, once you have found the right set of parameters for a profitable trading strategy, trading bots can be a very helpful (and profitable) tool in your trading arsenal.
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