How does a cryptocurrency trading bot work?

How does a cryptocurrency trading bot work?

Cryptocurrency trading can be extremely profitable, but in many cases, it requires constantly watching the market. This can, of course, become tiring very quickly, and it can make it seem like it’s not worth it to make many small trades, even if they are profitable.

However, there is a better way! While humans are often very bad at performing repetitive tasks, computers are very good at it. That’s why many cryptocurrency traders use crypto trading bots to do these tasks for them.

In this article, we’ll talk about what these bots are, how they work, and how you can use these algorithms to take advantage of automated trading for yourself. We’ll also give you an example of a trading bot in action to help you to understand the process! Let’s get started.

What is a crypto trading bot?

A crypto trading bot is a software program which trades automatically on your behalf. These bots work by triggering trades based on different indicators which you’ll need to program into the software. These triggers can be based on a variety of market indicators depending on how complex you want the trading strategy to be.

Using a trading bot can make it easier to perform lots of small trades, which would be tiring for a human to do manually. The benefit of this, of course, is that it allows you to capitalize on many small trades which happen throughout the day when the price fluctuates up and down.

While initially small, these small gains add up to big profits over time, and a well-trained crypto bot can help you to make a profit without needing to constantly be glued to your computer.

Crypto trading bots work particularly well when the market is trading sideways, as it allows you to build your stash of coins before the inevitable bull or bear market strikes.

Example of bot trading

Jimmy decides that he wants to try using automated trading strategies to secure crypto profits and grow his Bitcoin holdings. So, he invests in a crypto trading bot software package and begins working on making it profitable.

He decides to capitalize on the daily movements on Bitcoin for his experiment. After setting up the bot on his exchange of choice with his API key, he decides on a trigger which the scripto will act on.

After looking at the chart, he’s certain that Bitcoin will at least be trading rather flat today. So, Jimmy sets the bot to buy Bitcoin when the daily price goes down by 2%, and he sets it to sell Bitcoin if it rises 2% from that baseline.

Now that the bot knows the rules, it’s ready to begin trading for him. Jimmy heads off to do other tasks for the day, and the script starts trading based on his rules. Later in the day, he checks to see how things are progressing and sees that the bot’s trading strategy is profitable!

Jimmy’s trading strategy is a success, but if it wasn’t, he could easily make adjustments to dial in the software based on his results. Experimentation is necessary to find the right balance between profit and risk when using bot trading strategies.

What trading pair should you choose for a crypto bot?

In most cases, Bitcoin will be the best base currency to use. On the majority of exchanges, this trading pair will normally have the most trading volume, making it easier to capitalize on small gains.

However, smaller trading pairs could be profitable depending on the situation. Make sure to evaluate carefully and account for any wild price swings, particularly on pairs where there is little trading volume, as it could quickly mess up your strategy!

Crypto trading bot strategies

Every trading algorithm needs a strategy! While there are a few different ones, Bitsgap’s bot relies on the grid trading strategy as outlined above. This strategy works by placing buy and sell orders which are a specified degree above or below the current market price.

Strategies like this work very well in calm markets where the volatility is rather low but still present. Grid trading strategies do not work well in markets where there is extreme volatility though, so be careful!

If you feel that the market is about to turn in one direction or the other, it’s best to pause your bot and wait for the market to settle before you continue.

How does the Grid strategy generate profit?

The Grid strategy works by making lots of small trades to capitalize on a market which is not very active. All cryptocurrencies will have very small price movements throughout the day, and by using a bot, like the one at Bitsgap, you’ll be able to take profit many times throughout the day.

However, you need to make sure that you’re accounting for trading fees as well. Your price gap needs to be small enough to realistically get a lot of hits through the day, but large enough that fees don’t eat all of your profits.

How much crypto do you need to launch a bot?

Fortunately, you don’t need much cryptocurrency to launch a bot. You can start with a small amount of money, or even no money at all if you want.

That’s because Bitsgap actually allows you to test your strategies to see how they would perform in real-time before you invest any money.

This can save you a fortune, as most strategies will require you to do some fine-tuning before they are profitable. It’s important to realize that a trading algorithm is not 100% hands-off, and you will need to do some management of the bot to make a profit.

In closing, crypto bots can be very profitable if you take the time to learn to use them properly, and it’s a great way to add more coins to your portfolio while you wait for the big gains! Small profits add up, and if the market is in a flat cycle, you could easily double the number of coins in your portfolio while you wait for the bigger profits in a bull market.

Ready to bring your crypto to the new level?

Bitsgap is an all in one tool to trade and manage your cryptocurrency.

Get started free