Trading cryptocurrency can be very profitable but also highly unstable and time-consuming. With digital currencies like Bitcoin, Ethereum, and thousands of altcoins trading 24/7, it is impossible for even the most vigilant human traders to be in the swim of all things every moment, or they fail to make timely decisions. Here is where automation comes into play.
Automated cryptocurrency trading allows traders to actually implement their strategy without having to be glued all day to the screens. It does not matter whether it is a beginning investor or an experienced one; with the knowledge of how to automate their trading, it is possible to receive even higher income at lower levels of stress. In the next article, we are going to discuss how to start automated crypto trading, the required tools, and which strategies are more efficient with automation.
Why Automate Cryptocurrency Trading?
But before we dive into how you can automate the trading of cryptocurrencies, let’s first consider why you might even want to do so.
24/7 Trading: Stock markets are time-specific, that is, they open at certain hours and close at others. Cryptocurrency markets, however, never sleep. Automated trading means you’ll never miss a trading opportunity, even while you are asleep.
Speed: Automated systems can execute trades much quicker than humans can react. In a market where prices can swing double digits in minutes, speed is critical.
Emotion-Free Trading: Fear, greed, or anxiety creates mental detractors who will not make good trading decisions. The automated system executes pre-defined strategies with greater consistency.
Backtesting: Automated systems can run backtests on historical data and see how a strategy performs. It helps refine and refine strategies before committing real capital.
Multi-tasking: You can run multiple trading strategies across different assets at the same time, increasing diversification and reducing risk.
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Step 1: Choose an approach to automate for trading.
It will be the first strategy you are willing to implement, the one you’ll want to automate. It is basically a set of rules defining when and how to execute trades.
Some popular strategies include:
Trend following is when you follow the market, analyzing its trend and trading in the same direction. Buy when it’s going up and sell when it reverses.
There’s also arbitrage – here the situation is that the price of the same asset appears differently on different exchanges. Small discrepancies like these would be completely impossible to exploit manually in real-time due to the speed.
Mean Reversion Strategy: The idea is that the price of the asset will revert to mean or average price. In case the average price shifts away from that level, the system will buy or sell expecting change.
Market making involves the initiation of buy and sell orders at regular intervals around the market price with an intent to capture the bid-ask spread. Automated marketing is a highly popular strategy among professionals.
Grid Trading: In this strategy, a grid is created and buy/sell orders are placed at fixed price levels. It makes money by buying at the low and selling at the high when the price moves within a set range.
Choose an appropriate strategy according to the risk appetite, time duration, and market view.
Step 2: Choose an automation platform.
For a cryptocurrency-based auto trading, you will be required to have an algorithmic trading support system. There are several of them with various capabilities and functionalities.
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Trading bots
These are preconfigured software that enables execution of trades based on predefined strategies. Here are some of the most popular crypto trading bots:
3Commas: It is easy to use and provides multiple bots to support different strategies like dollar-cost averaging, grid trading, and options strategies.
HaasOnline: A trading bot platform with very high customizability-it’s really for professional traders. That’s why it’s meant to automate advanced strategies.
Cryptohopper: Cloud based bot. This allows you to automate many different exchanges. Beginner-friendly and also comes preloaded with strategy templates.
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Exchange with built-in automation tools
Some of the crypto exchange tools have their respective automation tools so that third-party bots are not used here. Some exchanges like Binance, Kraken, and KuCoin offer advanced order types and APIs on their platforms through which one can develop an automated trading strategy.
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Developing a customized bot on APIs
You can develop your trading bot customized, using the exchange APIs if you have some programming knowledge. Most of the major exchange cryptocurrency platforms provide APIs by which traders can connect their accounts and implement their desired strategy.
Primarily, Python and JavaScript are used for developing bots because they have fantastic libraries and great communities.
Back test the strategy:
After choosing a trading platform and strategy, backtesting is another very important thing. Through backtesting, you can run your strategy against the historical market data in order to determine how it is going to perform. This step will enable you to really understand the benefits and drawbacks of your strategy.
For this reason, do not forget that the past is a guide, not a promise of the future. Still, backtesting can provide you with an idea of how your strategy might perform in the future.
Test with different market conditions: Test the strategy under various market conditions such as bull, bear, and sideways markets before you deploy it with real capital.
Several such platforms such as TradingView and 3Commas offer one in-platform facility wherein a strategy may be backtested before taking it live.
Step 4: Launch and Track
You now have completed your backtesting stage. It’s time to deploy your strategy live on live markets. Before continuing, let us emphasize that you cannot automate your trading as a “set it and forget it” kind of affair. Markets are far too unpredictable. Strategies good and working today will not be good and work tomorrow.
Begin by risking a minimal amount of your capital when first launching your bot. You can only increase the investment once you are confident and can observe how the bot will perform.
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Monitor regularly
Although automated trading has reduced the watchfulness over the system all the time, you still need to monitor the activity and performance of your bot as well as the market. So, do not forget to review the settings of your bot and strategies by considering some changed conditions in the market from time to time.
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Use stop loss and take profit.
Automated trading systems are prone to risks in the marketplace, such as crashes or extreme volatility. You can minimize losses and close profits automatically by using stop-loss and take-profit levels.
Step 5: Diversify and Refine
Don’t depend on a single strategy or single bot. The best traders use different trading strategies to hedge against risk and make more profit. Protect your portfolio against various market conditions by running multiple bots with different strategies.
Besides, timely adherence to the latest market data and trends is essential to stay ahead of the curve.
Portfolio Diversification: Utilize multiple bots in multiple cryptocurrency pairs.
Strategy Optimization: Continuously alter the strategy parameters based on the latest market behavior.
Risks and Challenges
Albeit numerous benefits offered by automated cryptocurrency trading, you need to be aware of these risks and challenges:
Market Risks: Crypto market volatility can lead to big losses unless you manage it appropriately.
Technological risk: Automated systems rely on technology, which sometimes fails. Power outage, connectivity issue, or a server outage may be recognized for the performance of the bot.
Over-optimization: If a strategy based on historic data is over-optimized, poor future performance may be experienced. Be alert not to overfitting a strategy to past market conditions.
Security: Make sure your bot along with your accounts for trading is safe. Two-factor authentication should always be used with caution, and you should never share the API key with an untrusted website.
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Outcome
Automated cryptocurrency trading is actually the best way to benefit from the changes in the market while saving the maximum time spent in front of the computer screen. Proper automation, using a well-thought-out strategy along with the right platform, would make trading much more consistent.
But automated trading certainly should not be thought of as a way to make gains without effort. In fact, it involves just as much study of the market and continuous monitoring as manual trading. It always carries risk.
Following the steps discussed above, one can start automating their crypto trades and opening new avenues for profit in this very dynamic, ever-changing market.
