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How bots are used for crypto signals?

Adam Cochran conducted a survey across digital asset traders and found that 86% of transactions resulted from a crypto signal bot. 

The study cut across a population of 10388, where 38% admitted they were using bots to automate their trading experience. 66% of the respondents said they primarily utilize the bots in their margin trading, while only 4% use the futures trading bot signals.

This explainer article aims to expand your understanding of bots and how you can utilize them to generate crypto signals. 

Let’s go.

What is a Crypto Signal Bot?

A crypto bot is software that follows strict rules to execute trades on behalf of a Forex/Crypto trader. The strict rules are pre-programmed and are built on the basis of live market data. A trader could develop his/her own bot, while there are others that are developed by 3rd-party firms. 

Bots come in handy for crypto traders in times of extreme volatility. When utilized carefully, a trader could reap lots of profits during a highly volatile trading session. If left with incorrect configurations, the bots could easily result in substantial losses. 

Crypto trading bots are nearly as old as the cryptocurrency market. While being in their most nascent years, it is worth noting that the industry they belong to has lived for ages. The stock market, forex and commodities traders were already using automated trading tools in their work. 

Hence, the developers of crypto trading bots did not do a lot of homework when starting but had to develop the technologies/algorithms already existing. The former became a household name among digital asset traders only after the 2017 Bitcoin bull run. 

How to use a crypto trading bot to generate crypto signals?

Firstly, you need to choose the type of crypto trading bot you want as there are many different types of bots available. Some bots are designed for long-term investments while there are some that offer a set of pre-programmed trading strategies. Make sure to choose a bot suiting your investment goals.

Next, you may choose the cryptocurrency exchange to use the trading bot signals. Many bots are linked to specific exchanges. You may go with Binance trading bots if you want to perform trades on the Binance exchange. Once you have selected the exchange, it’s time to create an account. After opening the account, it’s time to transfer the funds to the exchange to use with your chosen bot.

Before starting trading with your bot, make sure to make various settings for your trading strategy. TrailingCrypto also offers crypto copy trading which allows you to copy the trades of professional traders in your trades. Apart from this, your trading strategy must include currency pairs, time frames, trading amounts, and more.

How does a Crypto trading bot work in order to generate crypto signals?

An API is a way for two computer programs to communicate with each other smoothly. Stands for Application Programming Interface. Crypto bots work through APIs and are built on top of a trader’s trading account. Usually, the crypto bot is linked to either a crypto exchange or a live market data feed.

Some of the bots come with in-built pre-programmed guidelines. But for others, a user will have to create their own preset market conditions. Set resistance and support areas, as well as mark overbought and oversold zones. 

Note the above-mentioned are not the only functions worth your time, you might have to look around for more. Due diligence, you know. 

The good thing about trading bots is they can do all the work for you if programmed correctly. You will never miss out on an opportunity, even when attending a party.

The crypto bot analyses the market on your behalf and conducts trade with 99% precision. 

For example, the bot will automatically buy Bitcoin at $22K and sell it at $23K. It all depends on your configurations. All in all, for a trade like this; you get to make a thousand dollars. 

A trader configures the bot to execute a trade when the price of an asset is above or below a certain level. Additionally, a change in trend could also trigger a trade execution. 

Remember there are different categories of crypto trading bots. Your choice depends on one’s individual trading style. Also, some bots are built in a way that they are fashionable for some digital asset exchanges. 

Configuring your bot to generate correct crypto signals

Crypto trading bots are growing in popularity and it is important for any trader to learn to use them. The concept of trading bots is still debatable on when they are a good strategy. However, millions of traders are using them as we speak. 

One common trading strategy that traders employ when using bots is the ‘Market-Making” mode. 

In Market-Making, the bot’s algorithms determine the direction of a trade by balancing the forces of demand and supply in a market. This allows the algorithm to place either a buy or sell order when a price action meets a certain condition. 

Take for instance John who had a meeting this morning at 10:00 AM that would last 5 hours. John does not want to leave his trades unattended for the 5-hours. Therefore, he configures market-making on his trading bot and sets it to buy Ethereum every time ETH drops below $2K; and a sell order every time the price goes above $2K.

To prevent losses when not watching the prices, John makes sure he has set take profits, trailing stop-loss orders and stop losses. The three are common features that you should consider when subscribing to any cryptocurrency signal bots. 

The bot allows traders to save time and leave most of the decisions to the system. In fact, traders are executed faster, and the high precision of the system ensures fewer errors. Also, remember that a trading bot is bulletproof from distraction. 

A first step to having automated trading in place is to share the trading account’s/exchange’s API keys with the bot. The bot in turn gains access to your account, your balance and the ability to buy or sell. If you want to migrate to another bot, you can easily revoke the API access at any given time. 

The Three Stages of Automated Cryptocurrency Trading on Coinbase

There are 3 stages to automated trading. These are the three necessary steps to generating crypto signals with crypto bots: Signal generating, risk allocation and execution. 

  • Signal Generator- A signal generator allows a trader to predict the market, predict possible outcomes and spot possible trades. Tradeworks is one of the most popular signal generators and uses live market feeds and technical indicators to predict prices and place trades. 
  • Risk allocation – To trade without a risk management plan is like sky diving without checking your parachute. A bot automatically conducts risk allocation by distributing and spreading risk by following a strict set of configurations. The guidelines are mostly on the basis of how much money is enough for the trade, compared to what is already available; as well as what fraction is the cost of the trade to the total capital risk. 
  • Trade execution – The bot places the trade at this phase. The system translates the crypto signals as API critical requests and communicates to the exchange that it should place a trade immediately.  

Should you use a Cryptocurrency Trading Bot?

Cryptocurrency trading bots cannot be an alternative for doing your due diligence. You need to use them alongside concentre market research, risk management and a good understanding of price action. Also, remember you require sufficient capital to invest in quality crypto trading bots. 

Crypto bots are a great way to trade all day without necessarily having to watch your screen for profitable trades. However, the good thing about crypto trading bots is that an experienced trader can set up the bot for a novice trader. Thereby enabling an inexperienced person to trade smoothly without necessarily learning the ins and outs.

The majority of digital asset traders utilize trading bots because the volatile nature of the crypto market avails lots of profitable opportunities. These traders utilize such bots for a number of reasons; but key among them is the need to minimize risks, increase efficiency, remain convenient, reduce risk exposure and generate more profits.

The high precision and speed of crypto bots are attributed to their ability to consume lots of memory and high computer processing resources. The trades are therefore executed more quickly and with greater accuracy. However, we don’t intend to promote these tools as a near-to-perfect system. It is deemed to fail when used incorrectly, plus it’s not all the time that you will earn profits.

How do you Choose a Cryptocurrency Trading Bot?

The following are important factors to consider when choosing a cryptocurrency trading bot: 

  1. Reliability – The first trading bot you first come across could be the worst decision of your life. Hence take enough time to conduct due diligence. A reliable trading bot is the basis of your success when generating automated signals. You also need to evaluate what bot works better with a given exchange. 
  2. Customization – Consider the level of customization available for each crypto signals bot. Personalization levels depend with the number of available features. The more features, the more the customization. Also, remember the trading bot will require upgrades so as to remain up to date and work correctly. 
  3. Associated risks – Remember to be careful and to conduct background checks when choosing a crypto trading bot. Experiment with your strategies and ensure it works perfectly according to plan. 

Closing Words

Crypto trading bots are becoming a household name today in the Defi space. As you have learned the ins and outs of using these amazing tools, maybe it’s time to take the next step. You will realize there are several bots in existence today. Some of them are free of charge, others charge a premium fee while a few are open source. The portability of a particular bot will also determine the ease with which you integrate it with other exchanges.

About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.