Inhuman speed and accuracy can drastically affect profitability. Exchanges allow everyone to participate – both human and AI. Thanks to automated trading, you can optimize your performance by utilizing crypto trading bots which plan and execute trades on your behalf.
But does automated trading increase your trading profits enough to make a difference? Let’s find out.
What is Automated Trading?
Automated trading is a process where a software or platform automatically executes tasks and trade orders on your behalf. Automated trading can be as simple as buying Ethereum every night at 4 AM or as complicated as following trading strategies that combine indicators and candle patterns.
You have a range of tools to choose from, which customize your trading experience and execute it in an automated way. The tools available are referred to as crypto trading bots or automated trading platforms.
Automated trading is nothing new. Traditional finance incorporated automation in the early 2000s when computers became widely available and the need for physical traders shrank. Hedge funds could design trading strategies and let computers execute them. A trading strategy is merely a set of rules followed to achieve profits, so if a bot can do it, there’s no need to hire a financial analyst.
There is no hocus pocus on the automated trading front. Crypto trading bots function the same way as a trader, just without the emotions and indecisiveness. But managing an automated portfolio is a different story.
Does Automated Trading Work?
Has automation and technology ever not improved something? Apart from the awful effects of social media on society, automation has done wonders for the world – including trading. Crypto trading bots benefit investors by providing them with tools to trade 24/7 in a 24/7 market.
Automated trading is for people who would like to achieve higher profits than when HODLing, but do not have the skill set necessary for trading. Additionally, bots are great for beginners who want to learn how the market works while automating a trading strategy, as the bot prevents them from making an emotional mistake.
However, automated trading does not work for veteran traders who know their way around the market. Your knowledge and intuition are enough to outperform a trading bot. It’s also worth noting that trading bots rely exclusively on technical market data. Bots can’t make predictions nor do they have any plans for high-volatility events such as regulatory bans and news.
Advantages of Automated Trading
Automated trading has plenty of advantages:
- Timing and accuracy
- Saving time
- Clean Trading
Imagine having a strategy and executing it within a fraction of a second. As long as the plan is good, you’re bound to profit. However, the same plan can go horribly wrong if it requires manual execution.
Perhaps you want to short Solana after it hits $170, but it does so in the middle of the night. You wake up to Solana falling from $170 to $150 and decide to open a late short there. But wait, SOL briefly retraces before continuing its downfall and hits your stop loss. You lose money because you were in the wrong place at the wrong time.
Trading involves repeating a lot of tasks, especially in fast-paced trading strategies. A scalper has to execute the same buy and sell order in a horizontal price channel for hours. Why should he sit in front of his computer when an algorithm can execute his actions? For the time being he can think of ways to improve his strategy or spend more time outside.
And why wouldn’t you save time? There’s no point in wasting time on execution when you already spent hours thinking of a plan. There are so many better things to do, like reading articles on how to increase your trading profits 😉.
Last but not least, automated trading is clean. What do I mean by clean? There are no emotions involved, no what ifs, no last-minute changes. It’s the difference between meditating while ruminating on the past and meditating while focusing on your breath. A trader almost needs to be a ruthless psychopath, and what better way to achieve such a state than to hire a cold and heartless algorithm.
Disadvantages of Automated Trading
Now wait a minute, there must be at least some disadvantages to automated trading. Crypto trading bots are not an easy-go experience, the leading problems include:
- Not so passive
Problem numero uno is experience. Are you experienced enough in crypto trading to create a profitable strategy? No matter what strategy you create, the bot will execute it. But will it make money? The crypto bot requires a skillful master, so make sure you’re up to the task.
Crypto volatility demands that you pay constant attention to the market, and it’s no different with automated trading. Just because you can instruct something to do your work doesn’t mean that it has no need for monitoring or management.
Security is another problem algorithmic traders face. Can you entrust your money to another platform? Crypto trading bots are generally secure since they use API keys to interact with exchange funds, but there is always the chance for something to go wrong.
Is Automated Crypto Trading Profitable?
Automated crypto trading is profitable as long as the strategy is good. A well-configured crypto bot can fetch profits for months and will only require adjustments every once in a while. However, profitability also depends on the bot’s stability.
You’ll want the bot to execute trades along with the market and not lag behind. If the bot or platform goes offline, you might not be able to close a trade or take profits unless you do it manually.
To ensure a profitable experience, you need to understand how automated trading works. You’ll also need to test the strategy with a little capital before going all-in. Once you play around with the platform, you should experiment with different strategies and select the best one.
Types of Crypto Trading Bots
Guess what? There is more than one type of crypto trading bot. This means you’ll get to experiment with options and find one that works for you. But beware, not all types of crypto trading bots are as predictable or consistent as you think.
Arbitrage is a type of trading where you profit by trading the difference between two markets of a single trading pair. Imagine buying apples for $5 from a farmer and selling them for $8 at the grocery store.
Due to high volatility, what happens sometimes is that a cryptocurrency can go for one price at one exchange and for another at a different one. $100 price differences are not uncommon and during the 2017 bull run, some traders made millions profiting from South Korea’s Kimchi premium.
Arbitrage trade does not reap major returns. You’re lucky to profit 1% or 2% per trade. But the benefit behind arbitrage is that you can execute multiple trades with zero risk in order to decrease the gap between the two prices. But this also means that arbitrage opportunities do not last long as investors are always on the lookout for these trades.
An arbitrage crypto trading bot is a lifesaver in this situation. Arbitrage bots constantly search for opportunities and automatically execute trades. This means that you can profit on one of the market’s simplest strategies. However, the trade is overcrowded, so don’t get your hopes up.
Not everyone likes to trade. Some market participants prefer investing in assets long-term. But every portfolio needs adjustments, which means investors must spend considerable time and effort swapping assets and altering allocations.
Rebalancing is more profitable than buying and holding because the crypto market has cycles. One quarter Bitcoin moves the most, the next, altcoins make a killing. That’s why you need to change your Bitcoin and altcoin allocations whenever the best moment arises.
Manual rebalancing is not difficult. You simply set sell and buy orders. But do you have the skills and data to know which assets to sell and buy? You might not, but a crypto trading bot does.
The benefit of a bot for portfolio rebalancing is that it automatically executes trades based on data from the market. You don’t have to interact with your portfolio nor adjust it alone, the bot does it for you. Moreover, you can always backtest a portfolio rebalancing strategy to see how it fares against buying and holding.
A market maker is a trader who profits from the spread of an order book. He constantly provides liquidity to both buyers and sellers, which he offers at a higher or lower price. Market making is similar to arbitrage trading, except that the scale is microscopic.
A market maker crypto trading bot analyses the price difference between the bid-ask spread. Even though the profits are small, you can earn a lot in revenue through high-volume trading.
Not interested in arbitrage, market making, or portfolio rebalancing? An alternative is applying custom trading strategies to bots. Traders who are acquainted with technical analysis can automate trades by telling a bot which rules to follow and under which conditions to trade.
For example, a trader who usually trades death crosses and golden crosses can trade manually once he spots the 200 moving average (MA) going under the 50MA. But he can also instruct the bot to monitor MAs and trade them automatically under the same conditions.
As long as you use an indicator and know a strategy for trading it, you can have a crypto bot execute the same trades as you would. You can even automate trades for chart and candle patterns.
Technical analysis isn’t the only custom strategy. Some market participants also have bots that scan news and buy an asset whenever an important keyword pops up. During 2020, many traders set up bots to buy DOGE whenever Elon Musk tweeted about Dogecoin.
If you want to learn more about trading automation, I recommend reading my course on crypto trading bots at the following link.
To learn more about increasing trading profits, I recommend reading the following literature: