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Crypto Trading Bots: Are Trading Bots Profitable?

Author: Jeffrey Craig Date: October 9, 2022

Unlike traditional stock markets, cryptocurrency trading never stops, making it virtually impossible for private traders to track market fluctuations, diversify risk, reduce error, and ensure trading discipline throughout the year. Unless you have some help, which is where crypto trading bots come into play.

Crypto Trading Bots Explained

What Are Crypto Trading Bots?

A bot is simply an automated program that performs repetitive tasks on the Internet more efficiently than humans. Trading bots are programs used to carry out automated algorithmic trading. They connect to crypto exchanges through APIs to quickly place small orders on your behalf. An API is needed for the bot to interact with exchanges, allowing third parties to pull data from the exchange and make specific changes to an account.

How Do Crypto Bots Work?

Crypto trading bots can closely follow price fluctuations, taking advantage of both highs and lows to profit by placing orders at speeds that are impossible to perform manually. During setup, these bots will often allow you to choose between customized strategies or popular pre-designed templates created by other users.

Different market types, tokens, and situations require different trading strategies, and identifying the most suitable strategy for each investment involves both research and good judgment. This means the process of trading using bots isn’t completely hands-free, demanding some input from the user.

Broadly, trading bots work in four stages: data analysis > signal generation > risk allocation > execution.

Data Analysis

Data is king, making data analysis crucial to the success of any crypto trading bot. Unlike humans, machine learning-enabled software can identify, gather, and analyze mountains of data faster than any financial analyst.

Signal Generation

Once the data analysis has been completed, signal generation is where the bot essentially does the trader’s work, making predictions and identifying possible trades based on market data and technical analysis indicators.

Risk Allocation

Risk allocation is where the bot distributes risk according to a specific set of parameters set by the trader in advance. This typically includes how much and to what extent capital is allocated for trading.

Execution

Execution is the stage at which cryptocurrencies are bought and sold based on the signals generated by the pre-configured trading system. In this stage, the bot triggers buy and/or sell orders based on the received signals and risk allocation, which are sent to the exchange via their API.

Pros Of Using Crypto Trading Bots

  • Bots are more efficient at using exchange tools and mechanisms like trailing stops to execute trades based on crypto buy/sell signals.
  • Using a profitable Bitcoin trading bot strategy ensures your portfolio is working to profit 24/7, providing you with a consistent profit stream that wouldn’t be possible through manual trading.
  • If you’re tech-savvy enough, you can even program your bot to do much more complex tasks alongside lightning-fast trade execution, like arbitrage and accumulation.
  • Many bots can be tested using trading simulators. Trading simulators are software that allows users to simulate trading using fake money. This enables traders to test out their strategies on live markets before committing real money to trade.
  • Bots don’t rely on emotions. You’ll often read that more than 80% of private traders lose money by letting emotions get in the way of decision-making. Choose instead to be among the 20% of smart traders who make money either by suppressing their emotions or harnessing the power of trading bots to ensure an objective, systematic approach to trading.
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Cons Of Using Crypto Trading Bots

  • A certain level of trading knowledge is needed to successfully use bots for trading.
  • Basic coding knowledge is needed to understand or personalize trading strategies beyond what an exchange/bot platform offers.
  • There are fees for using bots. If your strategy is inefficient, you may end up paying more in fees than your bot makes in profits.
  • As a centralized store of all your past, present, and future portfolio data, using an insecure or poorly designed bot can expose you to additional attack vectors.
  • Bots still lack the human component of trading, and cannot account for black swan events. Markets are ultimately run by humans, and there are some things a bot will never understand, and some things only experience can teach.

Are Trading Bots Profitable?

Using automated trading strategies, the financial services industry has raked in record profits for decades. In fact, over the past decade alone, algorithmic trading bots have taken over the entire financial services industry, with algorithms now being responsible for most of the trading activity on Wall Street.

The question then isn’t whether they work, but how well they work. However, the effectiveness of a trading bot largely depends on several factors, including the quality of the trading platform, and your levels of expertise and experience with trading.

Because of their technical nature, bots are not entirely suitable for first-time traders or those who lack knowledge of cryptocurrencies and basic programming. That being said, if you still want to start trading Bitcoin using a bot, there are some user-friendly bots that use more basic strategies to profit at lower risk.

The disadvantage of using a crypto trading bot is that you give control to what is essentially software written by someone else. This always has risks, since no code is impenetrable. The less you know about the code running the bot, the more you will rely on a third party to safeguard your assets.

Make sure to carefully examine all features before selecting a bot, and do some digging to see what other traders are saying about a particular product. Find out what broker the bot uses, and whether it’s a regulated brokerage provider. There are many Ponzi schemes parading as trading bots out there, peddling referral schemes as ways to profit from crypto trading.

Using The Top Trading Bots On Phemex

Phemex has partnered with a number of trading bots to make your trading experience as optimized as possible. Phemex customers can use NapBots, Stacked, and many more on our platform. Our most recent integration was with Goose-AX, this bot aims to make trading completely automated with fully customized strategies and proven success.

Top-4 Leading Trading Bots

  1. Napbots: This platform is great for users with varied trading experiences. NapBots updates and launches new strategies every three months to keep up with the latest market trends. The platform currently provides exposure to 20 different algorithmic trading strategies.
    The strategies have all been designed to capture trends over three periods using uncorrelated triggers (price-based indicators, not including take profits or stop losses, volumes, and funding fees).
  2. GooseAX: Goose-AX is a fully automated solution to trade altcoins on Phemex! They offer fully customizable strategies with proven success. While many crypto bots cater to some aspects of trading, such as indicators, Goose-AX strives to be a completely automated solution for all your trading needs!
  3. TokenBot: TokenBot is an automated copy-trading platform for social trading groups and communities within messaging apps such as Discord, Telegram, and Slack. Once added to a social media group, TokenBot monitors the admin’s account on an exchange and automatically notifies members of their trading activity details in real-time. The bot has more than 8,000 daily active users and streams close to $250 million per day in trading volume.
  4. 3Commas: 3Commas is a comprehensive platform that allows its users to automate trading using bots, follow and copy the actions of successful traders, and track top portfolios. It is currently the leading crypto bot service in the market and has raised $37M in a series B funding round led by Target Global, Alameda Research, and Jump Crypto, among others.

Conclusion

In a world dominated by automation, private investors are still stuck with inflexible and inefficient manual trading and investment tools, leaving them to be completely market-dependent, and unable to compete. Automated trading lets you surpass these barriers to use the market to your advantage. Get started with trading bots on Phemex today.


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