As a beginner, many people use the knowledge of conventional trading to crypto trading as well. But this algorithmic knowledge might not necessarily work in the bitcoin industry. This is because this asset class is highly volatile. If you are looking to buy some assets and hold or HODL them for some time, then you will not be happy with the volatility. It is possible that people might lose a substantial amount of their investments within a day or might be even a few hours. That seems to be a hard-luck, but it is common in the case of crypto trading. It happens with many beginners in this industry.
But with proper knowledge and experience, one can use volatility for their advantage too. You can simply invest at low prices when there is a tantrum in the market. And offload the risk when there is a euphoria state in the market. This principle can be used to generate algorithms and automate the full setup.
Overview Of Crypto Trading Bots:
Crypto trading bots are computer software and platforms like Bitcoin Compass that automatically sell and buy different cryptocurrencies when the time is right in order to generate a profit. That is the simple way how they work. But not all bots are profitable, and many might not give you any benefit. Hence it is important to do proper research before making any investment.
It is possible that experienced traders or programmers can create a simple bot for themselves too. The bots are designed to make a profit, and that profit is higher in risk-adjusted ways than if you buy the coin and hold them for a long duration. The term risk-adjusted implies the positive gains against the negative gains that traders might suffer during bitcoin investments.
To give an example of this scenario, think about this. Which situation would you rather prefer:
Daily returns worth 1% daily with no negative days, and the total return in a year is 250%
Returns of Monday is +10%, Tuesday is -5% and similar which gives a return of 500% within a year.
Mostly anyone would choose the second one, but in the first case, there is more consistency. This means it is a lot less risky.
Consistent results should be preferred even if there are a lot more returns in the case of the second case. This is because high risk-adjusted returns are always better than high returns. And this makes the bots for crypto trading so much popular and interesting. Using these bots helps to get the upside of crypto trading without getting the punches that come regularly. This makes it quite an attractive investment opportunity rather than holding the coin for the long term.
Working Of Crypto Trading Bots:
Usually, there are three moving parts of a trading bot. They are risk allocation, signal generator, and execution.
Signal generator: in this part, the predictions are made. There is some data that enters the signal generator, and then a sell or buy signal comes out from the other end. If there are bots that make use of technical indicators, then it is best to back away slowly.
Risk allocation: this part receives the sell or buys signal, and then the decision about how much to buy or sell is taken. Should the entire capital be allocated to the trade or a part? Should everything be bought at once or on average? This phase decides how much is to be purchased or sold.
Execution: if you want to buy a lot in one go for a lot of clients, then you would not want it as an all-in-one trade as you might not get a favourable price. It is best suited to dribble the order in the market.
All these three parts, i.e. risk, signal, and execution, should have their separate optimization processes and algorithms applied. If the bot that you choose fudges through any of these processes or disregards them, then it will not be a good thing for steady profitability. It is important to check all the reviews, ratings, and details of the terms of any bot or trading website before you sign up or make an investment.