Fluctuations of the cryptocurrency market have been known to scare a few traders or investors. The market is highly volatile, and unlike the stock market, it never sleeps. Crypto traders are familiar with the unpleasant feeling of waking up to see that their portfolio suffered losses while they were asleep.
This is where algorithmic or, better yet, automated trading comes in. Over the years, automated trading bots grew high in popularity as they allow trades to remain in control of their trading constantly. Bots are able to execute trades faster and more efficiently, unlike manual trading.
As cryptocurrencies grow in popularity, more tools are becoming available for traders. Picking a bit can be difficult as they cine with different features and for different fees. Let’s explore the art of automated trading a bit further.
What is automated trading?
Automated trading refers to a mechanical trading system that allows traders to set certain rules for both entering and exiting trades. Traders can apply precise money management rules to automated trading systems. In fact, over 70% of trades executed on the U.S stock exchanges are done through automated trading systems.
The bot’s software interacts directly with financial exchanges by using API and places buy/sell orders on behalf of the traders based on its interpretation of market data. The bot then makes decisions based on price fluctuations of the market and the pre-determined rules that have been established for it. The trading bot will analyze things like price, timing, orders, and volume, which can also be programmed to followed certain criteria.
How do trading bots work, and what are the advantages of using them?
Strategy-building bots will use technical indicators that are available on the platform of choice to build a set of select rules. The traders could establish the trade positions they wish to enter or input the type of orders they’re interested in. Most traders tend to prefer picking custom indicators and strategies. While this requires more effort from the side of the trader, it definitely allows more flexibility.
Once the rules have been created, the system will monitor the markets to find ‘buy’ or ‘sell’ opportunities based on the strategy the trader has set up. The strategy will protect any orders for stop losses – in fast-moving markets, such as cryptocurrency exchanges, trading bots can prevent you from suffering catastrophic losses.
There are plenty of advantages of using automated trading systems. Firstly, when you have a computer involved in monitoring markets and executing strategies, human emotions are not involved. When trading manually, many traders tend to gear away from the strategies by following intuition or other emotions. Some traders too conservative; their fear of loss and risk cripples them.
Automated trading helps preserve discipline. In many aspects of life, not just trading, creating a plan is just 20% of the work. The hardest part is sticking to it. Even when you have a highly profitable plan on your hands, many traders tend to ignore the rules they established or opt to skip it out on trades simply because they suffered a few losses along the way.
Automated trading systems can help you diversify your trading strategy as they are flexible and allow users to trade multiple accounts or various strategies at the same time. A computer can scan for opportunities and execute orders in seconds and at a higher, more significant, and more efficient capacity than any human being.
But what are the drawbacks of automated trading?
No system is perfect, and just with human errors, computers can fail. For example, if the trader’s platform relies on an internet connection and it fails, then the order will not be sent to the market. What if there is any inconsistency between the “hypothetical trades” generated by the bot and the actual platform component that turns them into real trades?
Furthermore, many people believe that it’s sufficient to just leave your PC open all day and let the bot do the trading. This is wrong – as with any mechanical system, automated systems must be monitored regularly. Power loss, computer crashes, and connectivity issues could result in losses.
The bottom line
While automated trading is appealing, it should not be deemed a substitute for manual trading. While they are a fantastic addition to your trading plan, you cannot purely rely on a bot. Make sure you have sufficient trading experience and choose the right trading bot before you get into it. Remember, there is no one-size approach that fits everyone.