If you have tried trading Bitcoin or any other cryptocurrencies, then you probably have noticed the serious limitations of doing that manually. Selecting the right coins to trade and when to trade them is extremely cumbersome and doing this all day can take a toll on any human leading to impaired judgment on the best trading strategies.
Couple this with the emotional luggage of dealing with a lot of funds and anyone can easily make the worst decisions at any given time. Automated trading was introduced back in the early 1990s in the traditional stock markets and ever since has grown in popularity.
Automated trading is especially beneficial in the cryptocurrency market because the price action of cryptocurrency assets is extremely volatile. In addition, the markets of digital assets do not close.
More often than not, traders have made and bet and went to sleep only to wake up to losses that would have been avoided if they were actively trading.
To avoid this, some entrepreneurs have created systems that take trading strategies and make trades on behalf of their users whether the user is using the system at that moment or not. They are called trading bots or software.
What are trading bots and what do they do
Simply put, these are pieces of software that are used to apply trading strategies to a market in order to automate functions such as opening and closing positions, analyzing market data to make the best possible decision on how to play a trade without having to factor in emotions and other human-prone factors.
Trading bots are not exclusive to cryptocurrency trading. In fact, these tools have been around for a very long time.
They were introduced in the late 80s’ as the era of computers was coming of age. People noticed that the traditional stock markets could be traded more easily of all the trading activities could be automated.
Skilled traders and investors put their years of experience into developing tools that could help them interact with trading platforms and trade on their behalf with minimal input. The only catch was (and still is) that you had to input the right kinds of parameters in order to be profitable in the markets.
This means that whatever the bots could do was basically what the trader could do only more precisely and faster. You will often hear the phrase that tools are only as good as the traders.
They basically improve upon the expertise of the user. If the user is inexperienced, the software will not make them a good trader. The same applies to bots used to trade bitcoin.
Where to apply bots in trading
If you are considering using a bitcoin trading bot, chances are that you are looking to use the bot in any of the following places – arbitrage, market making or normal trading applications.
The last option should be straight forward. It means that that you can apply a trading bot towards opening and closing positions based on the price action by buying low and selling higher. Normally applies to the same platform.
If, on the other hand, you want to take advantage of varying prices in different exchanges across the world, which is called arbitrage. It involves using a bot to buy an asset cheaply in one exchange and selling the same asset in another platform at a higher price.
There are more than 2,000 assets on the Coinmarketcap website. You can see how this can easily become exhausting if you try keeping track of several markets and exchange platform at any given time to find a trading opportunity.
The last place of application for trading bots is market-making. A market maker is a market participant that provides liquidity to a given market by placing both buy and sell orders for an asset with the aim of making a profit from the spread between the buy and sell bids.
The challenge with market making is that for a maker to gain a profit, they have to maintain a given percentage between their given asks and takes as the price of the asset changes.
This happens several times in a day which would make it cumbersome to track all day long and adjust both price points to ensure the profit margin is maintained. Trading bots are able to do this flawlessly making them appropriate for this type of bitcoin trading.
Types and examples of trading bots
There are three types of trading bots depending on their interfaces. These are web, desktop, and mobile. As the names suggest, the web bots are online websites that allow traders to login in order to start trading.
The desktop bots are those trading bots that can be downloaded installed and used on a user’s computer. These are more versatile and able to be used offline to certain limitations.
Mobile bots are perhaps the most versatile allowing users to install them in several mobile devices while accessing the same account. They usually have stippled down interfaces offering the basic trading features and analytics functions allowing anyone on the move to keep track of their account status. They are convenient as they ensure that the user has access to their accounts through their mobile phones or tablets.
It is not uncommon to see some bots available through all these platforms. For instance, Cryptohopper – one of the most popular trading bots is available in both web and mobile interfaces. 3Commas, another popular trading bot is also available on the web and mobile. A majority of trading bots including Bitcoin Compass trading software and others are web-based trading systems.
This is because it is harder to ensure a seamless experience whilst also developing a secure system to be used on a variety of computing platforms. It is much easier to focus on creating a secure web-based trading interface that will run on more predictable browser software.
Cryptocurrency markets offer a wide array of opportunities to profit from as a trader and investor. Using an automated system such as a trading bot is the best way to take full advantage of the markets. Trading bots will not guarantee any gains but they will definitely make the application of trading strategies easier and more profitable.
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