You might be wondering if trading bots really work. The answer is: yes, they do. A growing number of traders are also using bots; why should they go through the stress of trading when the whole process can be automated? However, not all traders who use bots are successful; otherwise, everyone would be trading crypto with bots.
So what are crypto trading bots and why do some crypto trading bots fail?
What are crypto trading bots?
Crypto trading bots are computer programs that perform trading tasks on your behalf. Bots analyze market information based on predetermined parameters and interpret it to determine when to trigger trading orders.
4 Reasons Why Crypto Traders Prefer Using Bots
Here are some reasons why traders prefer to trade using a crypto bot.
1. To remove the emotion
Besides having a reliable trading strategy, one thing that causes many traders to constantly lose money is unmastered business psychology. Many traders are driven by their emotions and make impulsive trades. They make decisions out of fear, greed and doubt.
A crypto trading bot has no emotion. It does what it is programmed to do, so many traders use trading bots to remove the effect of emotions from their trades.
2. To make the most of business opportunities
The market is open 24 hours a day, 7 days a week, and many trade opportunities suitable for your trading strategy can appear at any time. However, it is impossible to sit down to trade while the market is open, which assures you that you will miss trade opportunities.
Traders use bots to ensure they make the most of trading opportunities. Trading robots do not sleep and can help you execute trades even when you are not actively trading.
3. To execute fast trading strategies
Some strategies require you to make quick decisions and sometimes even execute many trades in seconds or milliseconds. Crypto trading bots can help you execute many trades in milliseconds, something humans cannot do efficiently.
Consider Arbitrage Trading and Others high frequency trading strategies as examples. It is impossible to always meet the speed requirement, which makes your trades less efficient.
4. To reduce business stress
Manual trading can sometimes be very stressful, especially if your strategy requires sitting in front of your chart for long hours. Such a strategy is brain consuming and will consume critical hours of your day that are useful for other activities.
A good solution to this problem is a crypto trading bot. This way, you don’t have to look at your charts to perform trade analysis and execute trades (at least not as often). Of course, you can always check at the end of the day to see what trades have been executed and their results.
5 reasons why your crypto robot may not work
However, not everything is clean navigation. Crypto trading bots don’t always work as expected, which can lead to losses.
1. Changing markets
In crypto, past results do not guarantee future returns in trading. A strategy that has always worked well does not mean that it will continue to give such results in the future. Market conditions change and the strategy programmed into your crypto trading bot may not be effective.
2. Adjusting your robot unnecessarily
There is a thin line between this and the previous point. Although you may need to adjust your strategy to respond to changing market conditions, you will not be successful in trading if you still have to adjust your strategy after a series of losing trades.
Constantly adjusting your bot will only make it ineffective. The strategy you should use should be backtested because switching to a strategy that you haven’t properly backtested is always a bad decision.
3. Inadequate backtesting
Backtesting requires you to test your data through a series of trades of the past. An effective backtesting method takes a lot of data into account to show you the result of your trading strategy. Backtesting can be done manually or automatically.
Trading robots do not improve trading strategies; they only help you to be more efficient in your search for trade, execution and exit opportunities. Thus, not testing your automated strategy will most likely lead to losses.
4. Buy or invest in cheap robots
Investing in robots because they are cheap is doomed to failure. This does not mean that you have to subscribe or buy an expensive crypto trading bot or that reliable trading bots have to be expensive. The thing is, price consideration shouldn’t be the main thing you look at when trying to buy a bot. You need to check the results it has produced over a long period of time and the amount of expected profit against your trading goals.
Of course, we don’t expect you to buy or subscribe to a bot with an expected profit lower than the subscription amount. You should also consider the price at which you buy a bot based on your trading balance. We only emphasize that this should not be the main focus when choosing one.
5. Trading on the wrong markets or exchanges
Crypto bot creators usually recommend the best conditions for a bot to work. That a crypto trading bot works best when trading a specific asset does not mean that it would work well with another asset.
Some robots, for example, are created to trade in low volatility markets; their use in highly volatile environments may cause them to malfunction. A robot that was created for certain Bitcoin trading conditions may not perform well when used to trade Litecoin.
Also note that some bots are exchange specific and may not work as expected when used on another exchange. For example, your bot may react consistently to false market moves if not used in the right environment.
3 tips for buying a crypto trading bot
When trying to buy a trading bot, always remember these three things:
1. Always Check His Background
Before choosing a crypto trading bot, ask about the track record of the bot. It’s not a good idea to risk your money on a bot you know nothing about, it’s gambling. The track record of the trading bot over time would give you an idea of what to expect. For example, a bot with a monthly return of 3% to 6% for almost two years gives the hope of earning such an amount for you.
Whether you choose a free or paid crypto trading bot, it should only be based on its history. If you want to build your own trading bot, you should test it on lots of past data or at least use it on a demo account for a while to make sure it works before you risk your money.
2. Creator Credibility Matters
Some famous companies offer crypto trading bot services. These companies care about their names and reviews, so they won’t want to give you bad information.
Some companies also employ expert traders with years of experience in the market who have programming skills or at least instruct programmers properly to create reliable trading bots.
3. Check reviews
Those who have used a bot can tell you a lot more about it. A review from those who have used the trading bot is important and a good way to check what past and present users have to say.
Patience is the key
Always be patient when trying to choose a trading bot. You need to check all the details because a poorly automated crypto trading bot can cause a good strategy to produce bad results. Always do your research well before risking your trading capital.
The information on this website does not constitute financial advice, investment advice or trading advice, and should not be relied upon as such. MakeUseOf does not give advice on trading or investment matters and does not advise buying or selling any particular cryptocurrency. Always perform your own due diligence and consult a licensed financial adviser for investment advice.