3 Tips For Buying a Crypto Trading Bot—and 5 Reasons Your Bot Might Fail – MUO – MakeUseOf
Just because you buy or subscribe to a crypto trading bot doesn’t mean you’re guaranteed success.
You may be wondering if trading bots truly work. The answer is: yes, they do. An increasing number of traders are also using bots; why should they go through the stress of trading when the whole process can be automated? However, not all traders who use bots are successful; otherwise, everyone would trade crypto with bots.
So, what are crypto trading bots, and why do some crypto trading bots fail?
Crypto trading bots are computer programs that carry out trading tasks on your behalf. The bots analyze market information based on predetermined parameters and interpret them to determine when to trigger trading orders.
The following are some reasons traders prefer to trade using a crypto bot.
Aside from having a reliable trading strategy, one thing that makes many traders consistently lose money is unmastered trading psychology. Many traders are driven by their emotions and make impulsive trades. They make decisions out of fear, greed, and doubt.
A crypto trading bot doesn't have emotion. It does what it is programmed to do, so many traders use trading bots to take away the effect of emotions from their trades.
The market is open 24/7, and numerous trade opportunities that fit your trading strategy can appear anytime. However, sitting down to trade for as long as the market is open is impossible, making it certain that you will miss out on trade opportunities.
Traders employ bots to make sure that they make the most of trading opportunities. Trading bots don't sleep and can help you execute trades even when you are not actively trading.
Some strategies require you to make quick decisions and sometimes even execute many trades within seconds or milliseconds. Crypto trading bots can help you execute many trades within milliseconds—an act impossible for humans to carry out efficiently.
Consider arbitrage trading and some other high-frequency trading strategies as examples. It is impossible to always meet the speed requirement, which makes your trades less efficient.
Manual trading can sometimes be very stressful, especially if your strategy requires sitting in front of your chart for long hours. Such a strategy is brain-consuming and will eat up critical hours of your day that are useful for other activities.
A good solution to this problem is a crypto trading bot. This way, you don't have to watch your charts to conduct trade analysis and execute trades (at least, not as often). Of course, you can always check at the end of the day to see what trades were executed and their results.
However, it's not all clean sailing. Crypto trading bots don't always perform as expected, which can lead to losses.
In crypto, past results do not guarantee future returns in trading. A strategy that has worked consistently well does not mean it will continue to give such results in the future. Market conditions change, and the strategy programmed into your crypto trading bot may not be effective.
There is a thin line between this and the previous point. As much as you may be required to adjust your strategy to meet changing market conditions, you won't be successful in trading if you always have to tweak your strategy after a series of losing trades.
Consistently tweaking your bot will only render it ineffective. The strategy you should use should result from backtesting, as changing to a strategy you have not properly backtested is always a bad decision.
Backtesting requires you to test your data through a series of trades from the past. An effective backtesting method takes a lot of data into consideration to show you the result of your trading strategy. Backtesting can be carried out either manually or automatically.
Trading robots do not improve trading strategies; they only help you be more efficient in your search for trade opportunities, execution, and exit. Thus, not backtesting your automated strategy will most likely result in losses.
Investing in robots because they are cheap is bound to make you fail. This is not to say that you must subscribe to or buy a costly crypto trading bot or that reliable trading bots must be costly. The point is that price consideration should not be the major thing you look at when trying to buy a bot. You must check the results it has produced over a long period and the amount of profit expected in relation to your trading goals.
Of course, we don't expect you to buy or subscribe to a bot with an expected profit lower than the subscription amount. You must also consider the price you buy a bot based on your trading balance. We are only emphasizing that it should not be the main focus when choosing one.
Crypto bot creators typically recommend the best conditions for a bot to work. That a crypto trading bot works better when trading a specific asset does not mean it would do well with another asset.
Some robots, for example, are created to trade in low-volatility markets; using them in highly volatile environments might cause them to malfunction. A robot that was created for some trading conditions on Bitcoin may not work well when used to trade Litecoin.
Also, note that some robots are exchange-specific and may not work as expected when used on another exchange platform. For example, your bot might react consistently to false market moves if not used in the right environment.
When trying to buy a trading bot, never forget these three things:
Before choosing a crypto trading bot, request the bot's track record. It is not a good idea to risk your money on a bot you know nothing about—that's gambling. The track record of the trading bot over time would give you an idea of what to expect. For example, a bot with a monthly return of 3% to 6% for close to two years gives an expectation of making such an amount for you.
Whether you choose a free or paid crypto trading bot, it should only be based on its history. If you are to create your own trading bot, you should backtest it over a lot of past data or at least use it on a demo account for a while to be sure it works before risking your money.
Some reputable companies offer crypto trading bot services. These companies care about their names and reviews, so they wouldn't want to give you the wrong information.
Some companies also employ expert traders with years of market experience who have programming skills or at least instruct programmers correctly to make reliable trading bots.
Those who have used a bot can tell you much more about it. A review from those who have used the trading bot matters and is a good way to check what past and present users have to say.
Always be patient when trying to choose a trading bot. You need to check all the details, as a poorly automated crypto trading bot can make a good strategy produce bad results. Always do your research well before risking your trading capital.
The information on this website does not constitute financial advice, investment advice, or trading advice, and should not be considered as such. MakeUseOf does not advise on any trading or investing matters and does not advise that any particular cryptocurrency should be bought or sold. Always conduct your own due diligence and consult a licensed financial adviser for investment advice.
Temitope holds a B.A. and M.A. in linguistics. He started trading forex five years ago, and not long after that, he picked up interest in the crypto and blockchain systems. He has been a writer since 2019, and his experience in the Fintech industry has inspired most of his articles. When Temitope is not writing, he takes his time to learn new things and also loves to visit new places.