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What are crypto trading bots and how do they work?

Bots are not a new thing in the traders’ world. Stock traders have been using these tools for quite some time already, and now it is possible to get one or two to trade cryptocurrencies. They can really come in handy if you are not able to monitor multiple charts all day long or if it is hard for you to take your emotions out. What can be easier? Just download the app, set your conditions and wait until it does all the work for you. In reality, you may be astonished by the number of bots there are and how different their functionality can be.

Let’s take a look at some of these bots and compare their characteristics.

Arbitrage bots

These types of bots are used to examine prices for the cryptocurrency you want to buy across multiple exchanges, so you could purchase it for the lowest price and then sell it for the highest one. You can certainly do that on your own but it will be time-consuming, and you can easily miss the right moment to buy or sell. It resembles trading stocks, when you are looking to make a profit from the volatility of the price difference. However, there are some downsides to using arbitrage bots.

First and foremost, it is important to make a thorough check of the exchanges where you want to buy crypto for the lowest price. It is quite common for these kinds of exchanges with the lowest prices to have security or trust issues, and some of them may be involved in different kinds of fraud.

Verification processes can be time-consuming, and the price for the crypto you want to buy can change while you’re waiting. This kind of issue can really limit the use of arbitrage bots.

The fees can be your biggest concern here. They can be charged not only for your transaction but also for using an exchange or a platform. So in the end, after paying a higher network fee to make your transaction faster and a fee for using an exchange, you might end up with no profit at all.

More complicated examples of arbitrage bots can be found in triangular arbitrage. The trader exchanges one currency at one bank then converts the second currency to another at the second bank and then converts the third one to the original currency at the third bank. However, triangular arbitrage can work on one single exchange: in that case, the trader exchanges his funds into three currencies with a profitable exchange rate to make a risk-free profit.

DCA bots

Dollar-cost averaging or simply DCA bot buys cryptocurrencies at the regularity you specify. It places the first buy order followed by extra orders in case the price goes the opposite direction of the strategy you chose to uphold. The volume and price of take-profit are recalculated with every new order.

To put it simply, DCA bots — like most of the other types of bots — use your exchange account to create orders at the right moment. The only condition you need to set is the interval between your purchases and the amount. In the end, the DCA bot does all the routine, allowing you to focus on other essential things so it can be very helpful in terms of time-saving. Still, there are some negative aspects that you should keep in mind when using DCA.

You can use market volatility whether it goes in your direction or not. DCA works great when the market is trending, and in that case, it allows it to generate stable profits. But when the crypto market experiences a heavy reversal, DCA strategy won’t do any good here.

Using a DCA bot requires you to have a lot of patience. This kind of strategy does not include being extra active on the market, and thus it is more suitable for only those who want small and stable gains.

Grid bots

Grid bots are somewhat similar to dollar-cost averaging bots. They allow you to place a series of orders within a given price range. When your sell order is done, the grid bot instantly places another purchase order at a lower grid level. When using the grid bot, you can set the number of levels that suits you best.

The difference between Grid and DCA bots is that Grid bot places Sell orders for each order instead of one for all purchases in DCA.

With Grid bots, you will have to choose whether you want smaller gains and a higher number of trades, or fewer deals but with bigger profits.

Just like DCA, the grid bot can help you to get potential profit even when you are off your PC or smartphone, so you could be trading 24/7 without the need to be online.

When using grid bots you should keep in mind that they place sell and buy orders within a specified limit. In case the price drops below this limit, grid bot will not execute any new buy orders.

Scalping bots

Scalping trading is characterized by quickly making small trades within minutes or even seconds for small consistent profits that accumulate gains throughout the trading day. A crypto swing trading bot often takes a similar approach but may operate on a slightly longer time scale or interval. Crypto scalping bots can be used for both Bitcoin and altcoins, but Bitcoin is considered as a golden middle between reliability and volatility. However, if you are planning on using a scalping bot, you need to know that your strategy must rely on multiple indicators, such as Relative Strength Index, Moving Averages and Bollinger Bands.

Scalping might be risky, and requires a lot of technical analyses, thus making this method for more experienced traders. Using bots in this kind of trading not only helps to trade non-stop, but also can help to take your emotions away in case you tend to panic selling if the chart goes down. Still, there are some cons to crypto scalping.First of all you need to have a good amount of funds so you could make your bot accumulate gains for you.

Second, the fees can eat up your gains, in case you make too many trades.

Last, but not least you need to base your trading strategy on technical analyses and thorough market research, otherwise your losses will be more than your potential gains.

Can trading bots help you in the crypto world?

As we can see, there is no such thing as a perfect crypto bot. Each one of them has its cons and pros, and it is up to you to decide which one fits you best.

What can be said for certain is that crypto trading bots can make trading more efficient and less emotional. However, it is you who must set their conditions, make technical analyses, study the market and so on.

The crypto market is known for its high volatility, and it is impossible to know beforehand what and when will impact the price of your digital assets. Without a proper plan and strategy, you cannot expect to succeed. After all, trading bots are merely tools, and how to use them properly is only up to you.

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December 8, 2021

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