The act of utilizing computer programs (also known as crypto trading bots) to buy and sell digital currencies on someone else’s account is known as automated cryptocurrency trading.
These software applications are designed to respond to changes in the market and enable trading at the ideal time. Additionally, automated cryptocurrency trading eliminates the risk and emotion associated with manually purchasing and selling crypto.
The majority of automated crypto trading platforms are still APIs, although some more recent crypto bots use smart contracts and function directly on the blockchain. The term “API” stands for an application programming interface, which enables your account to connect with a cryptocurrency exchange so that it may open and close positions on your behalf based on predefined criteria.
Trading cryptocurrencies automatically has numerous benefits over doing it manually, one of which is that bots may operate nonstop. They will always stick to their game plan because they are emotionless, and they will swiftly adopt any new market trend or event that occurs.
There are many different categories of cryptocurrency trading bots, each with unique features, functions, and costs. The most common ones are often grid trading or arbitrage bots. While grid trading is based on the “buy low, sell high” strategy, arbitrage bots take advantage of price gaps across exchanges.
Different features can be found on some automated crypto platforms, like the hodl function on 3Commas. This goes beyond simple trading and enables users to automatically purchase and store cryptocurrency by doing so at a discount. The user is free to select the cryptocurrency they desire, and a bot can help them accomplish just that.
Data analysis, signal generation, risk allocation, and execution are the four processes that automated cryptocurrency trading typically follows.
- Data analysis: It is crucial for success in today’s tech-based society, which is why a crypto trading bot requires it. Data mining activities can be completed more quickly by machine learning-enabled software than by a human.
- Signal generation: Following the completion of the data analysis, a bot can anticipate market trends and identify potential trades using market data and technical analysis indicators.
- Risk allocation: The bot distributes risk across several investments depending on specified criteria provided by the trader in the risk allocation function. These regulations often detail how trading will be conducted and what portion of funds will be used.
- Execution: An execution is the process by which cryptocurrencies are bought and sold in response to signals sent by the pre-activated trading system. The signals will produce buy or sell orders, which are then transmitted to the exchange through its API.