Trading bots for trading on a cryptocurrency exchange: How do they work?

August 24, 2022

With the help of trading bots, traders can switch their activities to automatic mode. But to get a stable profit, it is important to track market changes and take them into account to set up the bot algorithm.

What is a trading bot?

The term “trading bot” should be understood as a special program that connects to the terminal and independently performs the tasks necessary for the trader. The value of such software is that it allows you to automate work with the market.

Such bots are often used not only by individual traders but also by large organizations – trading companies, investment banks, funds, and others. There are two main types of bots that are used in trading:

Signal bot analyzes the market situation and gives recommendations for opening or closing a trading position. At the same time, this bot can indicate the recommended lot size and the balance of funds.
Automatic bot is completely autonomous, it independently (without the participation of a trader) opens and closes transactions in the market.

Both kinds of these bots analyze market data and make decisions based on it. In fact, this is a digital copy of the logic and actions of the trader himself.

How to use a trading bot?

Programs with algorithms written in them can perform any trading task. This allows you to automate different styles of working with the market:

Scalping bots help greatly reduce the workload of traders who repeatedly open and close trades within an hour.
Day trading algorithms with opening and closing positions within one day are also automated without any problems.
Swing trading works with positions that are open for several days or weeks.
A medium-term trading strategy involves holding positions for a period of one month or more.
In long-term investment (in opening positions for a year or more) robots are rarely used, but they simplify analytics and allow to notice changes in time.

You can use bots in any terminal that has access to the API (application programming interface) of the exchange. Not all robots are equally effective, and you need to be able to determine the quality of their trading or signals.

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The Poloniex bot lets to automate the trading process and strategy.

Advantages and disadvantages of using trading bots

The main advantage of using trading bots is to remove the human factor from the trading process. A trader cannot trade stably for a long time due to physical and especially psychological fatigue. And the bot is able to work around the clock.

There are also a number of other reasons why robots are often used for trading:

The program can simultaneously work with a large number of assets. A trader simply does not have time to analyze and make the right decision with a large set of assets.

Speed reaction. In scalping and day trading, it is important to quickly respond to the appearance of a favorable market situation or a signal to exit the market.

The bot does not need to click the mouse to open a position, the speed of its reactions is much higher than the human one. This means that with proper settings, the robot will be able to close more profitable trades per day than a human.

The bot is not affected by emotions. One of the main reasons for draining a deposit during trading is emotional action. A trader may feel fear of loss, and a desire to recoup or take even more profit after a series of successes.

Each of these emotions leads to error and drain. The robot, in any situation, acts strictly according to the algorithm.

24/7 market scanning. The trader receives information that he could miss in those moments when he is out of the market.

There are also disadvantages to using trading bots:

The bot cannot make decisions on its own. In the conditions of the changed market situation, the program will continue to operate according to the outdated system. It can’t reset itself.

For this reason, the trader needs to change the bot algorithms by adding new data. Without such a correction, its effectiveness will inevitably decrease, and it will begin to incur losses.

There is no flexibility. Sometimes you need to consider additional factors to make the right decision. If the necessary information is not in the automated algorithm, then the robot simply does not recognize favorable conditions.

Poor program quality. There are many variants of trading bots for sale on the web, but they are not guaranteed to make a profit, even despite positive reviews. You can buy a bot and not earn anything.

As a result, you need to either choose a quality product very carefully or pay an experienced developer to create a bot for yourself.

Risks when using trading bots

The main risk is that the program will work according to the established algorithm in conditions of a sharply or significantly changed market situation.

If the user does not make corrections to the code in time, the bot may start opening losing trades and continue to trade in the red until it loses all the money.

It would be good if the conditions for automatic shutdown are specified in the bot when a certain part of the deposit is lost.

The same situation can happen with advisors (bots that give signals to open a position). A trader who relies too much on such programs may miss key changes and enter trades that would be unprofitable under the new conditions.

There is also a risk of bots being hacked by hackers, including those connected to trading on a secure platform.

***

The use of bots cannot be considered a way to generate passive income.

And beginners should not place high hopes on program trading alone. First, you need to find and hone an effective algorithm in practice, and then look for a bot to automate the strategy or its individual components.

When working with various automation services and ready-made bots, it is important to protect API keys by storing them in a safe place.

Also, do not use bots that try to request permission to withdraw funds. They should include only trade. If the program has a built-in mandatory withdrawal function, it is most likely malicious and can transfer money to scammers’ accounts.

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In an interview with Reuters in August, one of the Taliban’s top decision-makers, Waheedullah Hashimi, said under the fundamentalist group the country would be governed by “Sharia law and that is it.” Under the Taliban’s interpretation of Sharia law, homosexuality can be punished by death. Balkhi said when she and her family heard the Taliban had entered the city, they went into hiding, leaving their home in Kabul and moving to a new secret location to escape detection. “The Taliban have exact information about every family here,” she said. Balkhi fears her family could be attacked or killed for knowingly hiding an LGBTQ person. Unable to sleep out of fear of being discovered, she said she is worried if the Taliban find her, they will stone her to death for being a lesbian. 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>>Read more

Trading bots for trading on a cryptocurrency exchange: How do they work?

What is a trading bot?

How to use a trading bot?

Advantages and disadvantages of using trading bots

Risks when using trading bots

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