One of the defining aspects of the crypto industry is its heavy digitalization and advanced technology with each decentralized finance platform and centralized exchange offering cutting-edge products to their clients. Many people focus primarily on bitcoin auto trading and other forms of automation to build their investment portfolios.
Why is this connection between the crypto market and automation technologies so strong? Will it continue to strengthen in the foreseeable future? Here are some of our thoughts on this matter.
How Automated Trading Changed the Playing Field
Digital assets like cryptocurrencies or NFTs are traded only on the internet without any limitations or direct oversight. It is impossible to ban crypto wallets or prevent someone from sending their funds to another wallet at any moment. This phenomenon creates a financial market where retail traders work around the clock.
The internet also makes many transactions instant as soon as they can be processed by the network. It happens even quicker on centralized exchanges. Since all wallet-to-wallet transactions are irreversible, all bitcoin auto trading decisions matter.
Humans have many weaknesses making them inferior traders compared to modern trading bots. Let’s take a look at some problems that these machines solve:
- 24/7 trading ─ A computer does not need to rest, sleep, eat, drink, use the toilet, or engage in other activities that may hinder its performance. Whenever market opportunities present themselves, robots act. A good signal may pop up at the dawn of Monday or at midnight on a weekend and bots will act on them decisively.
- No hesitation ─ Human decision-making is prone to errors due to various factors such as stress, doubt, fear, mood swings, and more. The biggest advantage that a bot has over a typical trader is that it never stops to second-guess itself. It will act regardless of any factors that should not be taken into account in an automated trading system.
- Strong performance ─ Due to its ability to make decisions without any doubts, a bot usually outperforms, on average, retail traders during periods of strong market volatility. If your technical analysis strategy does not have any significant errors, it will perform well despite high-magnitude price fluctuations.
The Prevalence of Technical Indicators
When it comes to investing in stocks or bonds, it is a good idea to use fundamental analysis as your main approach to assessing the current value of any given financial asset. It works with real estate, commodities, and stocks.
The cryptocurrency market is different. Unlike traditional fiat currencies, gold, silver, S&P 500, and many other typical instruments, it is a purely speculative asset with its value defined only by traders and huge investors. The market decided what should be the fair price for Bitcoin or Ethereum, or any other crypto token.
In such environments, one cannot rely on fundamental methods and should focus on technical indicators. Retail traders have to build consistent strategies and endlessly backtest them using corresponding features on platforms.
Backtesting with bots is a good way to identify any algorithmic errors, issues with indicators, or other problematic factors that may hinder the performance of any given trading strategy.
It is necessary to learn how technical indicators work to form a cohesive signal-generating system that can consistently provide true positives for your bots to act on.
How Does Automation Work?
A typical automated trading system for the crypto market consists of three distinct components:
- A signal generator ─ Usually, it is a strategy deployed on TradingView.
- A script processor ─ Any automation platform that can be integrated with other platforms via API.
- An exchange ─ Most centralized exchanges have a functional API feature allowing third parties to connect and bypass the user interface.
Each component plays a significant role in the overall performance of an automated trading system. Signals must be correct more often than not. Automation vendors must operate with 100% uptime and reliability. Exchanges should have a good API, instant order execution, and sufficient liquidity.
When all these elements work as intended, they create a harmonious complexity that generates money for its owners. Such systems are suited best for the cryptocurrency industry due to the reasons discussed previously!
If you want to be successful in the world of crypto, you must focus on using as many instruments as possible to be ahead of your competition. Whether you deal with Bitcoin, Ethereum, or any other coin, without modern trading bots you will lag behind the market by a significant margin!
Benefits of Automated Trading in Crypto
Automated trading offers several advantages to traders:
- Speed and efficiency ─ Algorithms can execute trades much faster than humans, reducing the potential for slippage and taking advantage of fleeting market opportunities.
- Emotion-free trading ─ Algorithms operate based on predefined rules and don’t succumb to emotional biases, which can be a significant challenge for human traders.
- 24/7 Trading ─ Automated systems can operate around the clock, enabling traders to take advantage of global markets and opportunities even when they’re not actively monitoring them.
- Backtesting and optimization ─ Traders can rigorously test their strategies against historical data, helping them refine their approach and increase the likelihood of success.
The Main Takeaway
Automated trading in the world of cryptocurrency represents a powerful tool for traders looking to capitalize on market opportunities. By utilizing carefully designed algorithms, traders can execute strategies with precision and efficiency.
It is close to impossible to imagine a crypto market that does not have any automation. Financial institutions, experienced retail traders, novice investors, and everyone else use bots to hedge against various risks to their portfolios. Bots can be your main investment direction or a diversification tool depending on your particular requirements and risk management style.
- Is automated trading suitable for beginners in cryptocurrency?
Yes, but beginners should thoroughly understand their chosen strategies and implement robust risk management practices.
- Can I use automated trading for multiple cryptocurrencies simultaneously?
Yes, many automated trading platforms support trading across various cryptocurrencies.
What are some common risk management techniques in automated trading?
Common techniques include setting stop-loss levels, position sizing, and diversifying the portfolio.
- Are there any fees associated with using automated trading platforms?
Yes, most platforms charge fees, which can vary based on the services offered.
- How often should I monitor my automated trading system?
It’s recommended to monitor the system regularly, especially during significant market events or changes.
Can I backtest my trading strategy on historical cryptocurrency data?
Yes, most platforms provide tools for backtesting to evaluate strategy performance.