Over recent years, the streamlining process of complex tasks such as automated crypto trading has sparked a unique era of growth for both the crypto and the trading industry.
Some individuals have even turned their talents into profits by building and providing others with crypto auto trading bot services making the barrier to entry (knowledge, experience, and finances) even lower for newcomers.
Still, many are unaware of what exactly automated crypto trading is and if it would complement their investing journey or not.
What exactly is It?
Automated crypto trading is the process of using software or a “bot” to place crypto trades on your behalf.
Initially, even just a few short years ago, establishing an automated crypto trading platform was quite cumbersome, and unless you had technical coding experience, you would more than likely not be involved in this sub-niche.
Now, however, by providing creative solutions, pre-coded and ready-to-go trading bots are available to the masses.
While most bots are customizable, allowing the trader to set specific conditions on when to buy or sell a crypto asset, some bot services are delivered with a pre-set trading strategy replicating the exact trades or trade strategy the creator themselves use.
This has proven beneficial for traders of all backgrounds and experiences, from beginners to even senior traders, as it provides an opportunity to trade alongside the most successful traders (and gain access to the same profit-making trades) with just a few clicks.
Benefits of bots
There are clear benefits to leveraging automated trading technology, such as the last one discussed, being able to replicate winning trades from successful traders.
But there are other benefits it offers, such as allowing those who may have prior commitments to attend to, like a career, the ability to spend minimum time breaking into a new venture such as crypto trading.
It also allows for a “true” source of passive income by having your bot work for you 24/7. An actual chance to “make money as you sleep.”
For newer traders, automated crypto trading can, in a sense, act as a mentor if a trader were to dive deeper into attempting to understand the reasoning and conditions behind the scene driving the order executions.
In other words, the trading strategy the bot is set to adhere to.
But the benefits don’t stop there. Not only are there numerous trading strategies and techniques, but there are also different types of trading bots to accommodate those trading methods.
Different types of automated Crypto Trading
From Dollar Cost Average (DCA) to Grid, Arbitrage, and even “Sandwich” automated trading bots, there’s one that fits nearly every approach possible.
You’ll often hear the terms of “timing the top” or “timing the bottom,” – which is perhaps the ultimate goal for most traders.
Unfortunately, rarely does a trader, let alone trader(s), actually accomplish this goal due to various reasons, including emotions getting in the way and dealing with irrational market sentiments.
Surprisingly, the DCA method has proven time and time again to be one of the most effective trading strategies out there.
DCA is the process of deploying one’s capital across multiple lots (or trades) with the intent of getting a better cost average for the total number of shares purchased.
The primary thought driving the DCA strategy is that markets (especially crypto) are volatile, and instead of making a single large trade (where if the price fell, the trader would instantly be down in their position), one would have additional opportunities to buy the asset at a lower price, improving their overall purchase price if they used DCA.
Grid bots are a type of automated trading that adheres to and trades within an upper and lower price range for specific crypto.
Multiple trades will be placed on the way down while visiting the established lower price range, but if the price falls below that level, no further trades will be placed.
Once the asset experiences a change in trend and begins to trade higher, nearing the upper price range, it will start to exit those previous buy positions at a profit until all trades have been exited for a profit.
This method combines the DCA and range trading strategy.
Automated arbitrage trading is a bit simpler in theory as the main goal is for the software to acquire the crypto of your choice at the lowest price possible off of one exchange and instantly sell it on another exchange that has it listed for a higher price.
For instance, let’s say Bitcoin is trading for $20k on exchange A and $21k on exchange B. The arbitrage bot will purchase the Bitcoin from exchange A for $20k and simultaneously sell it on exchange B for $21k resulting in a $1k profit.
While the example used displays a 5% gain in profit, some traders will set their conditions to execute over smaller gains like 1% and, in some cases, even smaller. However, these trades usually execute much more frequently, making it possible to outweigh those big wins by accumulating numerous small wins.
Automated sandwich trading relies on a more technical, systematic approach.
It scans exchanges, searching for when a trader places a bid on a particular crypto and tries to outbid the buyer. If the bot successfully acquires said asset, it will automatically sell it to the original bidder at a higher price.
The risk is taken by assuming that the original bidder will still want to acquire the token at an even higher price than initially intended on.
For instance, if an order is placed to buy Bitcoin at $21k, the bot may try to overrule that trade by buying Bitcoin at $21,001.00 and instantly sell it back to the original bidder at a higher price like $21,002.
To automate or not
Incorporating automated crypto trading into your strategy is easier now than it has ever been before.
Although there are no guarantees for success with any bot you use, the best way to see if an opportunity is right for you is to try it.
But remember to be disciplined when it comes to capital and risk management. If you are new to this area and testing automated trading for the first time, it may be wise to restrict your capital to 0.5% (or even lower) per single trade until you find a strategy that fits your investing style.