I was recently reading through a very interesting bitcoin trader review and decided to check the comments to see what people thought of it. I couldn’t help noticing that many commenters didn’t know what they were talking about. They would throw a lot of jargon around without fully grasping what they meant. I understand that cryptocurrency trading bots are the next big thing in the world of crypto. However, you will never be able to take full advantage of these marvels of modern technology without having at least a working knowledge of what they are and what they do. So, I decided to do a little something for my readers: I put together a list of things everyone should know about cryptocurrency trading bots.
1. What Is a Trading Bot?
A trading bot is a piece of software that communicates with an exchange through a special language known as an application programming interface (API). It tells the exchange when to place buy orders and sell orders. In effect, a trading bot is doing your job. That’s what you do when you’re interacting with an exchange: you’re telling the exchange when to buy and when to sell things on your behalf. The bot does the same, except it can’t speak English or take a mouse and start clicking on random buttons on the exchange’s website. So, instead, it uses the API.
API is a way for one application to talk to another through the exchange of data. Your bot will be able to talk with the servers at the exchange to collect data on prices and balances as well as send through buy and sell orders.
Bots aren’t just used for cryptocurrency trading. They are used for all types of trading. In fact, they are a common feature of trading in the fintech industry and have been used by savvy investors to build fortunes.
You need to program your bot and give it the parameters it is going to use when executing trades. Ultimately, the bot is only as good as the person who programmed it as it will act according to that person’s skills and ability to come up with contingencies in case things don’t go according to plan.
2. The Legality of Trading Bots
This is something a lot of people fear. They think having a trading bot is somehow unfair and gives the owner of the bot an undeserved advantage against other traders on the market. That’s not true.
Using a trading bot is legal, of course. In fact, it is a lot more than that as it is usually preferred in many cases. The reason why is that a bot is capable of making many trades in a short time, which means it will be the counterparty to many trades and give a lot of investors the chance to get out of their trade. This is called liquidity and is a big issue on the cryptocurrency markets. In a world without trading bots, you need someone who wants to buy your asset for you to be able to sell it at a specific price. You also need a willing seller if you want to buy an asset at a specific price. If there aren’t many traders on the market or the traders there aren’t trading high volumes or with high frequencies, you might not get a favorable price for lack of a willing counterparty. Trading bots solve this problem by being able to buy and sell assets at many different prices, providing liquidity for other players on the market. It is also an advantage for the owner of the trading bot as it allows them to use the arbitraging strategy, where they take advantage of spreads in the prices of assets across exchanges to turn a profit.
3. The Profitability of Trading Bots
Now, this is one of those topics that need a nuanced discussion that looks at the subject from all angles. I’ll be clear — trading with bots is profitable but not inherently. The success of your trading bot is determined by several factors. These include the following:
- How good all the software involved is. This includes the bot itself, the API it uses and the software on the exchange’s servers.
- You need a good strategy to be able to make money, whether you’re using a bot or not. The bot will only be as good as the one who programmed it.
- The markets will also influence how well your bot performs. Sometimes, the market can be extremely volatile or lose liquidity entirely, which may affect the profitability of your trading bot. Market conditions change and affect the profitability of your bot if you don’t adjust it to deal with the changing conditions.
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4. How to Obtain a Trading Bot
There are numerous ways you can a trading bot. You can buy your bot from an online vendor, you can lease the bot, you can use an open source bot, most of which are free, you can try out a demo bot, or you can go all out and make your own trading bot. There are plenty of popular bots out there that you can buy, lease, or try for free. However, if you’ve got some programming skills, you can try your hand at making your own bot.
5. The Importance of Testing
Remember how we said a bot is only as good as the person who programmed it? Well, whatever strategy you choose, you need to test it first, either on live data or historical market data, to find out if it has any chance of success. Most bots and related platforms offer that functionality. You can run your tests as many times as you want before you start trading. That way, you’ll be extra sure you’re on to something before you ever risk a single dollar.
6. Your Bot Needs to Be Running for It to Work
Your bot should be on for it to be able to execute trades on exchanges. The cryptosphere is running 24/7 — it never sleeps. It only makes sense that your bot never sleeps either. Your computer should, therefore, be on and your internet connection working at all times for the bot to work. If that isn’t possible, then you should look into the possibility of using cloud servers to host your bot.
7. The Facts About APIs
You should create an API that your bot will use to communicate with the exchange. Your key and “secret” should be part of your bot so it can access the exchange. Also, don’t plug your bot into just any platform. Some of them are scammy. Stick to the well-known exchanges.
Hi there! I’m Sethu, your go-to guy for all things tech, travel, internet, movies, and business tips. I love sharing insights and stories that make life more interesting. Let’s explore the world together, one article at a time!
