Crypto Trading Bots

Introduction

Trading bots are a hot topic nowadays, seems like everyone is talking about building bots, using bots, or just questions in general about bots. I wanted to take a moment and provide some additional details into what crypto trading bots are, how they work and answer some common questions I have received about them.

I’ve personally been utilizing and building crypto trading bots for a little over 6 months. I have learned a lot from it and will be sharing my findings throughout this article.

What are Trading Bots?

We can start by simplifying it even further and just identify what is a bot in general. Put simply, a bot is an automated program that operates on the internet and generally performs repetitive tasks more efficiently than humans.

Crypto trading bots operate under the same basic principle. They are software programs that execute buying and selling functions based on preset parameters. This allows traders to take the emotions out of trading or miss an opportunity for a trade.

Crypto bots allow you to automatically buy, sell or hold an asset in an automated manner, regardless of time of day or market conditions, if your bots preset parameters trigger, so will your buy/sell position.

One common misconception about bots is that you will get rich quick or every trade made will be a winner. Just like with any trader, nobody is hitting 100% of the time. Another common misconception is that all bots are created equal or do the same thing. Each bot is created with a different set of parameters or based off different indicators or trading patterns. You want to make sure before jumping into a bot that you have previous results of the bot so you can get an expectation of how the bot will perform, how many trades it makes and how often.

How Do Trading Bots Work?

The process for setting up a crypto trading bot isn’t very challenging but there are some steps you need to go through to get connected. In order for you to be able to trade with a crypto bot, you need to have an account with a crypto exchange and then you will need to give your bot access through an API key. You can generate this key through your exchange and then copy/paste it into wherever your bot is hosted.

When generating the API key, you only will need to give the bot access to execute buy/sell trades, you do not need to give it access to withdraw or deposit funds.

One of the nice things about trading bots is all your funds stay on your exchange, the bot is just sending trading signals to your exchange, so you don’t have to move money around to get setup.

You can generally break trading bots into a four stage process:

• Data Analysis
• Signal Generation
• Risk Allocation
• Execution

Data and data analytics is king when it comes to trading bots. Unlike humans, bots can identify, gather and analyze data much faster and in smarter ways than us.

Once the data has been analyzed, signal generation by the bot is where it generates the buy/sell signal. They are basically doing the work of a trader by identifying trades based on market data and technical analysis indicators.

Risk allocation is how the bot distributes risk based off the preset parameters by the creator of the bot. On some bot trading platforms you can set the risk allocation yourself.

Execution is the final stage of the process and is when the specified cryptocurrency is bought and sold based on the trading signals that were preconfigured by the bot creator. During the execution phase, the bot will send buy/sell signals to whatever exchange you connected the API to.

Ok, But Do They Actually Work?

From my personal experience, yes they do! I have been using trading bots in crypto for about 6 months. Some of the benefits I have experienced are the fact I can enter trades while I am sleeping that I normally would miss. But the biggest reason why I am an advocate for trading bots is the fact that it takes the emotions out of trading, maybe you enter a trade, it starts going against you and you panic sell out, or maybe a trade is working out and you think it will keep going higher so you hold too long.

Guess what.

Your trading bot won’t do that, it will stick to its preset rules and won’t deviate from the plan regardless of what outside factors are going on within the market.

It also frees up your time to do other things. Ever find yourself obsessively staring at a chart, or pulling out your phone every 30 seconds to look at the price once you enter a trade. With trading bots, they are doing the heavy lifting for you, so you can take that time normally spent obsessing over your trades and allocate it elsewhere.

How Do I Choose a Strategy?

There are all kinds of different bots out there whether it is an arbitrage/MEV bot, token lending bots, margin or leverage bots, or market maker bots. Then on top of that, you have a handful of strategies within each bot, Scalp bots, Day Trading bots, Swing Trading bots, Buy & Hold bots. It can be a bit overwhelming picking what type of bot you want to trade.

For the average person they will just be using a regular bot that doesn’t do arbitrage, lending, or market maker. Most regular bots will give you the option to choose if you want to use leverage or not.

Scalping

Scalping bots involve very fast trades and usually very low profit and stop loss levels. These types of bots may also be trading the 1 minute or 5 minute chart. For example, a scalp BTC bot may operate on the 1 minute chart and has a 0.5% take profit level and a 1% stop loss. So BTC may only need to go up or down a few dollars and you could be in and out of that trade in a matter of minutes. These strategies usually offer up multiple trades per day.

Day Trading

Day trading operates quite similarly to scalping, it is just a little bit slower. Day trading bots may execute buys and sells same day or within a few hours, where as scalping bots may be in and out in minutes. Day trading bots generally target volatility in the market and capture it intraday. These bots generally operate off of the 1 minute, 5 minute or 15 minute chart.

Swing Trading

Swing trading bots generally try to generate profit from price fluctuations that may occur between a 2-7 day time frame. These bots you may be entered into a trade and it may not hit take profit or stop loss levels for a few days or a week. The longer time frames utilized generally result in lower risk levels as they have more data to base their trades on. Swing trading bots generally operate off of the 15 minute, 1 hour, 4 hour, or daily chart time frames.

Buy & Hold

Buy and hold bots operate off a fairly basic premise, they identify buy points based off the bot creators preset parameters but usually don’t have take profit or stop loss zones set, or if they do, they are set very high. The point of this strategy is to allow the bot to catch lows on a token you want to hold long term and the bot can help you DCA your position. These bots are usually created off of the daily, weekly or monthly chart.

What is Leverage and How Does it Work?

When using leverage you are adding a level of risk to your trades, when you use leverage you are borrowing capital from your exchange to make a trade. This amplifies your buying and selling power and allows you to trade a larger amount of capital than what is in your account. This can be beneficial especially to accounts operating with a smaller amount of capital as it allows them to trade with a larger bank roll. While leverage can multiply your profits, it can also multiply your losses.

Let’s go through an example of how leverage works. Let’s say you have $1,000 in your account and you want to trade ETH, but let’s say you would like to use 5x leverage on this trade. This means you now have $5,000 at your disposal to trade with. Your initial $1,000 is used as your collateral, we will get to how that comes into play in a minute. Let’s say that ETH goes up 25% after you enter the trade, if you hadn’t used leverage, you would have made $250, but since you were using 5x leverage you made $1,250!

Now let’s say you bought ETH with 5x leverage and it dropped 25% from your initial entry, if you hadn’t used leverage you would have taken a $250 loss, since you used 5x leverage you would have taken a $1,250 loss. Not so fast! Since the $1,250 is more than your initial $1,000 collateral for your account, the moment the trade was down more than 20% which is $1,000, your account would have gotten liquidated and you would have $0 and that 25% loss on a trade, just turned into a 100% loss on your account.

This is why there is risk involved in leverage trading, the higher amount of leverage you use, the higher risk you are going to take. However with the right bots, and stop losses set, you mitigate a large amount of your risk involved with leverage and can use it to your advantage.

Let’s say for the example above, your bot had a stop loss set on ETH at 5%, well in that case, you would have taken a loss yes, but it would have been a smaller loss and there is no chance of your account getting liquidated from a 5% drop when using 5x leverage. This is how you can use it to your advantage.

BreadBots

Part of the reason I have extensive knowledge on crypto trading bots is because I have been working on and building my own for a while. I have been trading stocks and crypto for over 10 years and in that time, I have created several different trading strategies and indicators that helped me become a successful trader over the years. I have extensive knowledge on technical analysis and identifying patterns and trends in the market.

I have been testing and fine tuning some of my bots for several months now and have real world and back testing results showing the last 100+ trades or 6+ months of trading data. I am sharing BreadBots with the public because I think it is a great way to generate passive income and it makes it easy for the average person to see live trades in action and learn how the trade worked and why it worked.

Our bots have very strong results, I believe you will be pleasantly surprised by the results we have generated with our custom strategies. High profitability rate, consistent trades, low max drawdowns.

At the very least I encourage you to go to our BreadBots page and look at the bots trade logs and see for yourself. If you have any questions about our bots I am always available to answer questions.

BreadBots: https://www.breadbytes.com/breadbots

Conclusion

Crypto trading bots have continued to grow in popularity year over year. This actually isn’t just a crypto thing either, algorithmic trading bots are very common in the stock market. It is estimated that over 80% of stock trades made daily are from trading bots. I believe trading bots will continue to become more mainstream over time. Hopefully you got a better understanding of bots and the inner workings of them through this article. If you have any questions or want to know more, feel free to reach out to me on Twitter.

Also be sure to check out my website https://www.breadbytes.com which provides educational content, crypto trading bots and DeFi protocol reviews.

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