Trading bots are programmed algorithms designed to respond to certain market conditions based on pre-set parameters. These parameters are determined by the trader, trading platform or software developer.
Cryptocurrency markets operate 24 hours a day, seven days a week. This makes trading digital assets more difficult than traditional ones, since stock markets only trade within certain time frames and do not work on holidays. Cryptocurrencies are also extremely volatile. Significant exchange rate fluctuations can occur within a few minutes. All this encourages investors and traders to turn to automated trading tools such as bots. Let's take a closer look at what cryptocurrency trading bots are, how they work, and how effective such software is.
Popularity and demand for trading bots
Traders understand that it is important to control emotions in cryptocurrency trading, in particular fear—fear of missing out on profits, fear of big losses, fear of exiting too early, etc. A trading bot does not experience emotions and, when making transactions, focuses only on analytics and established algorithms. Bots also allow you to trade around the clock.
There are many different types of cryptocurrency trading bots, from simple spot trading to DCA (dollar cost averaging) bots. Some platforms provide traders with tools for network trading, arbitrage trading, and options trading. We have asked experts why trading bots are now very popular among traders, especially beginners, and also what user responsibilities an automated trading system can take on.
Chen Limin, Chief Financial Officer and Head of Trading at ICB Fund, says,
“The search for a grail that will allow you to earn huge money is a very popular topic in the financial markets. Beginners tend to have a distorted view of what they are just starting to understand, as well as to experience excessive optimism. So all sorts of personalities flourish, offering in a few days to learn how to trade profitably. Selling bots, in fact, is the same type of phenomena. Here you don’t even need to learn anything: I bought a bot, and it began to bring a good income. Of course, that won't work.
“A trading bot is a sequence of actions prescribed to be performed under certain scenarios. For this to work, its author must be well versed not only in the specifics of the market and the intricacies of executing transactions on ‘trading floors’, but also be a good programmer. Needless to say, there are not so many such people and they almost never run telegram channels or sell access to VIP groups or ready-made trading solutions.”
Marat Mynbaev, Founder of Amir Capital Group, an expert in fundamental and technical analysis of the crypto market, a professional investor and crypto trader, believes that automated trading systems, which include crypto bots, are one of the most used financial instruments in passive trading on a crypto exchange. With the right strategy for the bot, you can secure a profitability of 20–60% of the deposit per month. It is the profitability and minimal human intervention in operational processes that makes trading crypto bots popular among beginners and experienced traders.
The expert also notes that, according to the programming, the automated trading system takes over:
- Round-the-clock and non-stop work 24/7/365;
- Analyzing trading platforms and crypto assets, increasing the coverage of a trader's trade by several times and diversifying potential risks;
- Instant reaction to the situation on the stock exchange and on the news agenda;
- Analyzing quotes and making dozens or even hundreds of trade transactions;
- Simultaneous work with any programmed number of currency pairs and exchanges;
- Accessing table of limit orders in the stock market;
- Checking the reliability of the trading strategy and conducting a backtest by analyzing market data for the past period, etc.
The effectiveness of transactions depends on the algorithm embedded in the bot and the experience of the trader.
Analyst Aziz Kenzhaev says,
“As a rule, novice traders are limited in resources, time and finance. While learning to trade in financial markets or crypto trading, traders use trading bots to get instant profit. Bots have a prescribed action algorithm based on indicator data and price movement. A trading bot without the participation of the trader can open and close positions. Some systems even allow you to allocate a certain margin and leverage for each instrument.”
Trader Albert Safiullin explains the popularity of automatic trading systems by the fact that everyone wants to make money on the stock exchange, but not everyone succeeds. Therefore, people are ready to entrust their funds to trading robots.
Alexander Ryabinin has a negative attitude towards automated trading systems. He answered the question about the popularity of bots as follows,
“Because ads bombard people. For example, bookmakers are everywhere on the Internet. Privateers (bloggers) on binary options also contribute to the manifestation of interest in this. As a result, ordinary users, with no experience in the financial sector, are looking for the ‘Loot’ button from advertising. Automated trading (bot) completely does everything for a person, except for one thing, which is open a terminal for trading and run an adviser.”
Mikhail Alyonushkin, Managing Director of 3V FUND, is sure that the popularity of trading bots is due to the fact that most people do not want to think and spend a certain amount of time with the market, which is necessary for trading. Users just want to run a program that would do everything for them: generate income without their participation.
According to the expert, an automated trading system can take on the following responsibilities:
- Opening and closing trading positions;
- Analysis of some areas. The robot can really make decisions and implement them without human intervention. For this purpose it is written, but most often it is mistaken.
Dmitry Noskov, an expert at the StormGain crypto exchange, comments,
“Trading bots in general are a very convenient innovation, and, generally speaking, they correspond to the trends of the 21st century—automation, acceleration of all processes, convenience and minimal human participation. That is why they are so popular among traders, especially beginners.
“Novice market participants need maximum external help and the opportunity to transfer maximum functions to someone else. A trading bot makes deals in accordance with the diverse scenarios embedded in it (there are many more of them than a novice trader has in his head). The automated trading system takes on the functions of tracking the best moment to enter the market and closing a deal and the trading signals, making a decision to conclude a deal, and developing an investment strategy.”
Efficiency of automated trading systems
Before you start using cryptocurrency trading robots, you should consider in detail the parameters by which you should choose software:
- Security. Reliability is a prerequisite for any software that deals with sensitive data. Determining how safe bots are can be quite tricky. However, you can turn to experts or read reviews from real users.
- Continual work. Cryptocurrency markets operate around the clock and seven days a week. This means that the trading bot must be reliable in terms of an uninterrupted connection to the servers. If you choose a service that often loses connection, even just for a few minutes, then you may be missing out on a big profit opportunity;
- Convenient interface. Since cryptocurrency trading bots are designed to simplify the trading process, the crypto platform must also have a user-friendly interface. Intuitive design and streamlined layout with an excellent onboarding process reduces the risk of confusion, especially if you are a beginner;
- Profitability. Before you start trading, do a little research on the profitability of the cryptocurrency trading robots you are considering. According to the promises of the developers, all trading bots are profitable, but this is not the case. Use such software carefully and be aware of the risks.
We also asked experts how effective the use of trading bots in crypto trading is and whether such programs have any advantages.
Marat Mynbaev notes that the effectiveness of trading bots in crypto trading depends on the software functionality and algorithms, which is why the market can offer free one-factor programs with a template set of strategies, and quite expensive, self-learning smart trading robots based on AI technologies and machine learning. The future belongs to the latter. Representatives of the latest generation of "smart" algorithmic trading are able to respond to offers with lightning speed, process a huge amount of information in a short time, increase the coverage of crypto market offers using the machine learning method, quickly analyze and learn from their own experience, choosing more effective trading strategies. Trading bots based on artificial intelligence are constantly improving, attracting the attention of large players and increasing the cost of trading programs.
According to the expert, with all the advantages of cryptocurrency bots, it is too early to pass stock exchange operations to them completely. The experience of a trader plays a big role in the bot’s efficiency. He independently chooses the strategy and parameters of the algorithm, sets limits for transactions, determines the desired level of profitability of one operation, makes an algorithm for calculating profit / loss, etc.
Mikhail Alyonushkin answers the question of whether trading bots are effective,
“For the most part, no. Normal good robots will not be in the public domain, since the creation of these robots requires large amounts of money and smart, talented people.”
Albert Safiullin believes that automated trading systems still have advantages. They are convenient and do not require constant monitoring of the market. Also, the robot has no fear. It has a clear algorithm it executes. Another advantage is speed. The robot is already configured with what volume to enter the market, for which coin and when to fix the result, and it does this instantly.
Alexander Ryabinin says,
“I have not yet seen really working bots/distant advisers. Yes, at first they can show fabulous percentages. But in the end, they all lose the client's money. And they have one advantage. It's called the Wheel of Fortune. If you get into a good cycle, they will earn you money without any knowledge. But as a rule, people do not stop and in the next cycle lose everything.”
Aziz Kenzhaev believes that it is effective to use the bot when there is no time to engage in trading on your own. It must be understood that the trading bot does not see everything that happens in the market. The effectiveness of a trading bot in one cycle does not guarantee its effectiveness in another; in a sideways trend, such bots are usually ineffective.
Dmitry Noskov says about trading bots,
“Yes, it is quite effective—especially for beginners. There are many more possible scenarios for the development of events in a trading bot than in the head of a novice trader. And for experienced traders, this is a good option, since the bot can be adjusted to all the desired parameters and simply automate your trading process. For example, you can make deals at night when you sleep. The bot will do this without your participation.”
Chen Limin notes that in order to evaluate the effectiveness of automated trading systems, you need to understand what, why and how the machine should perform. For example, a person is used to trading during a sharp price movement, but does not always have time to notice it and enter a deal. Here a trading bot will come to the rescue, which will respond to the given triggers by opening and closing a deal. In fact, algorithms can be used in different ways. For example, with the help of neural networks, train the model to search for complex formations or their combinations on the charts. A person is simply not physically able to track all the coins that are traded even on Binance alone, and here the trader will receive a signal if the desired patterns appear.
However, according to the expert, first you need to create a database by yourself with the examples needed to train the model. Or, for example, a person wants to be one of the first to purchase coins immediately after listing: he connects via API to the exchange and writes the necessary code.
So, let's briefly summarize all the advantages of trading robots:
- Emotions do not influence decision making during trading.
- Multitasking—bots run and monitor many sources of analytical data for different currencies and can create multiple transactions at the same time.
- Round the clock operations.
Downsides of trading bots
Now that we know all the advantages of trading robots, it is worth delving into the disadvantages of using such software. With this question, we turned to the experts. They highlighted the main disadvantages of automated trading systems and gave some advice on how to get a working program and not run into useless fraudulent software.
Trader Albert Safiullin believes that the main disadvantage of a robot is that it is a robot. It does not know how to see the market as a whole. It does not know what is happening in the world of the crypto community, what affects the market, etc. The expert advises to use robots in the semi-automatic mode.
Chen Limin, Chief Financial Officer and Head of Trading at ICB Fund, says,
“The truth is that effective strategies are created with great difficulty and few people want to share them. That is why you are unlikely to buy a working algorithm. With almost a 100% probability, you have acquired at least ineffective or even malicious software. It is worth considering the fact that market conditions are constantly changing, which means that the code must be constantly refined. A person without proper knowledge of the market simply can’t do this. For beginners, it is most useful to understand the market and along the way try to automate some actions to increase their efficiency. Over time, this can lead to a complex and rewarding trading system.”
Marat Mynbaev, Founder of Amir Capital Group, an expert in fundamental and technical analysis of the crypto market, a professional investor and crypto trader, emphasizes that at least bot programs can maximize the efficiency of a trader, taking over operational processes and analytics, and insure against losses during market fluctuations. This does not mean that automated trading systems do not have flaws.
The expert identifies the following problems that a crypto trader should be aware of before trading:
1. Most bots follow a strict program, can only analyze in retrospect, learn from erroneously identified patterns, make a ‘survivor's error’, drawing conclusions only on the basis of good transactions. In addition, programs cannot always fathom the depth of the context of the market situation and predict a possible collapse in quotes.
2. High concentration of defective software in the market with system bugs and low efficiency. For this, it is recommended to use demo versions and proven automated trading programs.
3. Fraud in the crypto sphere and the dissemination of criminal schemes.
There is no perfect automated trading program, but there are bots that can be effective for the trader. According to Marat Mynbaev, an effective cryptocurrency bot has the following characteristics:
- Impeccable reputation on the crypto market and among traders;
- Long existence on the crypto market;
- High level of protection of personal data and security of transactions;
- Understandable interface and functionality and good technical support;
- The choice of crypto platforms with which the bot works (if the list contains mostly unknown exchanges, beware);
- The cost of the bot and possible profitability;
- The set of strategies that can be implemented during trading, etc.
Mikhail Alyonushkin, Managing Director of 3V FUND, highlights the following disadvantages of bots:
“Few robots operate in non-linear algebra. Mostly they are all written based on linear mathematics. The market itself is not a linear system, but more chaotic. The robot is not able to think non-linearly as the market does. In order not to run into scammers, it is better to buy robots from reputable resources. In a certain area of the market, they will work effectively.”
Dmitry Noskov, an expert at the StormGain crypto exchange, notes that the disadvantages of automated trading systems stem from the fact that trading bots are just programs, and the human brain thinks more flexibly, considers not only technical signals but also fundamental factors. Moreover, the program does not have such features as flair, intuition, which a good trader has. You need to buy only proven programs that have real positive reviews and developed by reliable, reputable companies.
Analyst Aziz Kenzhaev says,
“One of the disadvantages of the bot may be the inefficiency of its work in the sideways movement. In such cases, sometimes inexperienced traders increase the risk by changing the settings, setting up a more aggressive bot strategy. In my opinion, such intervention will only aggravate the situation and instead of increasing profits, the trader may, on the contrary, lose funds. When choosing a bot, require proof of its work and the history of transactions with it, and it should include the points of opening and closing the transaction. Always ask for a trial period, even if the bot is trading on ‘demo funds’. Look at each entry and exit points on the chart, because there is a possibility that this data is simply invented by the seller of such a bot. If there is no demo version, then you should beware.”
Independent financial expert Alexander Ryabinin advises studying the reporting of the bot for the last 5–7 years. However, few people can provide such reporting, since the robot loses money at this distance. But this is the selection criterion. The expert gives an example that Raiffeisenbank had a division of trading robots. In 2020, it lost a huge amount of funds and was reorganized, although before that, it had brought an average of 20% per annum and was developed by one of the great mathematicians.
Summing up, let’s single out the main disadvantages of automated trading systems:
They require control by the trader;
They have security and privacy problems;
They have trading losses;
There is a lot of fraudulent software.
Crypto traders can get significant results with cryptocurrency trading bots, especially when combined with traditional manual trading. But you can't rely entirely on automated systems.