To Bot or Not? How Crypto Trading Bots Work
Dec 13, 2021
We’re sure that you’ve heard the term ‘bot’ at some point in your trading journey, but what exactly is a bot and how is it utilised in cryptocurrency trading?
What is a bot?
A ‘bot’ (short for robot) is a software program that is designed to perform automated tasks. Bots are usually designed to imitate/replace human behavior and because they are automated, they operate much faster than humans. This is one of the reasons why they have recently gained popularity in forex and cryptocurrency trading.
What is a crypto trading bot?
Crypto trading bots have been around for a while, they were first introduced not long after the crypto market itself began. Crypto trading bots only really gained the attention of the public in 2017 after the first bull run.
Crypto trading bots are software programs that execute functions using artificial intelligence (AI) based on predetermined parameters. By using a set of algorithms, a bot will automatically buy, sell or hold your digital asset no matter the time of day or night from anywhere in the world.
Crypto trading bots are designed to trade purely on technical data and trends. This helps reduce a large portion of emotion-related trading mistakes which can often lead to big losses. With crypto trading bots, you can effectively trade 24/7, even whilst you are sleeping.
How do bots work?
Trading bots are usually linked to your trading account and communicate directly with crypto exchanges. Trading bots offer incredible speed and efficiency, with fewer errors and no emotional trading. These bots analyze the market and can execute trades based on predefined parameters set by the user. They can either execute trades on your behalf, or simply notify you of trading signals, to which you then decide whether or not to execute the trade. If you want to trade on an exchange, you will need to authorize a trading bot to access your account via API (Application Program Interface) keys.
Trading bots essential work in three stages: Signal generation, risk allocation and execution.
Signal generation - The bot essentially does the work of a trader, analyzing the market, making predictions and identifying profitable trading opportunities.
Risk allocation - The bot will allocate risk according to the predefined parameters set by the trader.
Execution - This is the stage where trades are executed by the bot based on the signal generation.
We encourage users to take extreme caution when exploring various trading bots, and ensure that the bots are reviewed and trustworthy. Your API keys are effectively keys to your exchange account, so don’t give them away lightly!
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