Should you trade using crypto trading bots? The truth is these crypto trading bots are actually computer programs that are designed to buy and sell crypto assets on your behalf. So, their main purpose is to make more money for their owners.
This is achieved by monitoring the market closely round-the-clock and responding according to a set of prefixed rules. You can, therefore, determine your bots’ behavior depending on your analysis of market actions like orders, market volume, prices, and time, etc.
Strategies for trading bots:
1. Mean Reversion:
This automated bot strategy rests on a direct assumption that when the prices shift from an average, they will go back eventually to that. This is found to work for both traditional stock markets and crypto markets.
A reason for this is the market psychology; so when an asset priced at an average for $1 increases to $1.25, traders sell the remaining in bulk, so that prices eventually come down to $1. However, currently, bitcoin is traded using automated trading bots like bitcoin loophole that carry out the trade automatically irrespective of time and price; but they are certainly increasing the trade.
Prices of assets can differ in different exchanges and this is because of price fragmentation; so, an asset A could be priced at $1 in one exchange and $1.02 at another exchange. Using this strategy for trading, you stand to gain profits through the buy and sell of the asset simultaneously in two exchanges.
3. Momentum Trading:
Here, the trader will examine the rise and fall of the market using its momentum. Ideally, you should ride any positive momentum wave, and then sell off the assets right after whenever the trend reverses. The reason behind this is the assumption that asset prices will go up above the average and then they will run out of force and plunge downwards.
4. Naive Bayes:
This is a key trading algorithm that makes use of machine learning for determining the probability of any outcome. So, you feed data into the trading bot and you can help it to understand the right entry or exit times.
5. Natural Language Processing (NLP):
Prices of cryptocurrencies can go up and down rapidly because of breaking news and articles, tweets, and such other volatile content. With the help of NLP, it is possible to instruct the trade bots to interpret words and phrases programmatically and then analyze the underlying market emotion.
For example, when your trading bot reads an article stating that asset partners with another to encourage mainstream adoption, it is probably a good time to start accumulating that asset.
To sum up, trading bots are definitely not inherently profitable; their success depends on a host of factors like software accuracy, quality of trading strategy used, market factors, and how you tweak the bot. Since you instruct the trading bot about which strategy to follow, it will be only as good as your strategy is. By and large trading bots are quite successful in the 24×7 market because it is not possible for humans to trade
round-the-clock. But, a lot can go wrong during this, and therefore it demands a great deal of expertise, knowledge, patience, and time to use a trade bot confidently. When you are starting out, you must tread carefully, and provide only small amounts of money for the bot to trade with.