In the beginning of the 2000s, it was hard to imagine that trading bots would become such a big part of trading assets. Close to 100% of all trades initiated by institutional investors are assisted by automation to at least some degree. According to surveys of the crypto market, over 65% of all retail traders use automated trading systems extensively.
A typical individual investor uses a Bitcoin trading bot to run a DCA buying system or a sophisticated trading system powered by a reliable technical analysis strategy deployed on TradingView. These bots can be quite good at reaching the levels of consistency that many human traders can only dream of. Despite being so popular and growing in popularity, bots have some disadvantages that should be considered by people interested in building an ATS.
What are Bitcoin trading bots?
A trading bot is a script that executes an algorithm when triggered by a trading signal. Some centralized exchanges offer automation services to their clients, but usually such bots are quite limited and do not provide the necessary level of freedom to investors. Third-party providers have much stronger feature sets and can connect to exchanges via API. Companies like WunderTrading are often picked because they deliver an excellent user experience.
An automated trading system that targets $BTC is what we call a Bitcoin trading bot. There are only three conditions for it to be called so:
- It must be an autonomous system.
- It must be connected to a centralized exchange.
- The exchange must have $BTC listed.
Since Bitcoin is the biggest cryptocurrency in the market, it is quite hard to find exchanges that do not have $BTC among listed assets. Some CEX platforms do focus on Ethereum and EVM-compatible assets exclusively, but they are quite rare and usually do not have a significant market share to be relevant for our discussion.
Advantages of a Bitcoin day trading bot
You can certainly run bots to open long-term market positions, but automation shines when it is applied to strategies that operate within much shorter time frames. Day trading is a great example of an area where bots excel and often outperform human traders on average.
An automated trading system has many advantages over humans when it comes to investing. Here are just some of them:
- Emotionless trading. Being scared to place an order or hesitating to close a position at a loss can be quite destructive for a portfolio in the long run. The trader’s psychology is quite important. Many experts believe that the strength of mind is much more important than a good analytical system. While such notion is a bit reaching, it is true that retail traders often make crucial mistakes due to fear, stress, anger, and greed.
- Working around the clock. One of the most difficult aspects of the cryptocurrency market that many retail traders struggle to adapt to is the fact that it never stops. Crypto is traded 24/7 all over the globe with promising opportunities presenting themselves day and night. Humans need to rest, sleep, eat, and socialize to function normally. Bots do not need any of that and can work at 100% efficiency around the clock.
- Advanced risk management. Thanks to many developers, you will be able to create automated cryptocurrency trading systems that are quite efficient at controlling risks. WunderTrading allows its users to employ a wide range of risk mitigation tools like delayed orders (stop-loss and take-profit), position size limitations, and more. It is quite easy to build a bot that will avoid risks and deliver consistent results in the long run.
- Continuous improvements. Right now, the WunderTrading platform offers its clients an exciting opportunity to use their new machine learning Bitcoin trading bot that applies the rules of statistical arbitrage to create a balanced portfolio of target assets. The expert AI-system is trained on the historical market data and manages your investments much better than an average trader.
- Affordability. Just a couple of decades ago, automation was something that only institutional investors could afford without putting their capital at risk. Modern individual investors can use all the advantages of trading bots for a fraction of the cost that investment banks used to pay for advanced trading algorithms in the beginning of the 2000s.
Contemporary trading bots generate profits consistently and the accuracy is quite high if you use them in tandem with a reliable technical analysis strategy.
Disadvantages of trading bots
While it is easy to get caught up with the benefits of running an automated trading system and look at the whole industry through pink-tinted glasses, we should never forget about some risks and issues associated with trading automation.
Here are some important downsides of automated trading that you should consider:
- The lack of control. Some retail traders feel very anxious when they cannot directly control their market positions. Automation works precisely because it can be autonomous and not be limited by the reaction time and speed of a human user. Many believe that without human intuition bots are unable to make good decisions.
- Volatility issues. While some bots will thrive in volatile environments, most automated trading systems can produce poor results during periods of high volatility or when something unexpected happens in the market. Obviously, the overall performance of your bots depends on the quality of your analytical system, but you should try to avoid running bots when prices change chaotically.
- Technical problems. Issues with connectivity, system failures, faulty equipment, and software bugs can cause bots to act not as intended or place orders with delays. These are mitigated by choosing a reliable automation provider, but you should never discount the possibility of a technical issue disrupting your trading activities.
- Technological complexity. Setting up an automated trading system can be quite challenging for someone without any technological expertise. Many experienced users will think that it is easy to just copy and paste some lines of code, but people without any prior exposure to advanced internet usage will struggle even with seemingly simple tasks.
We should also mention that many retail traders become over-reliant on bots and believe that they can invest everything in just a couple of automated trading systems. The best course of action is to create a balanced portfolio and diversify your investments.