What Are Crypto Trading Bots and How Do They Work?

Cryptocurrency trading happens round-the-clock, making it challenging to seize all market opportunities, even for the most experienced traders. Therefore, experienced crypto traders often turn to crypto trading bots to compensate for these limitations, using algorithmic trading programs to auto-execute thier trading strategies on their behalf.

What Are Crypto Trading Bots

Crypto trading bots are automated algorithmic programs designed to use specific trading strategies based on predefined parameters to execute trading strategies in the global crypto asset markets.

Crypto trading bots can work 24/7 in the crypto market to compensate for the trader’s human limitation and achieve optimal trades.

The types of trading strategies algorithmic trading bots can execute vary from bot to bot, with some professional traders developing their own programs to capitalize on inefficiencies in the market.

How Do Crypto Trading Bots Work?

Cryptocurrency trading bots are automated trading software built by a third party. You can buy or subscribe to trading bot software or download a free bot trading program. However, you need to have at least some basic understanding of coding and technical analysis in most cases.

You use automated crypto trading bots by connecting them to exchanges using an Application Programming Interface (API). In crypto trading, an API is an interface that acts as a bridge between crypto trading bots and the exchange platform to allow bots to execute trades and manage the trader’s portfolio.

Crypto trading bots make trades based on simple or complex predefined market indicators and parameters. Some common parameters bots use include price, time frame, and order volume, while common market indicators include moving averages (MAs), relative strength index (RSI), and more.

However, you still need to choose the trading parameters and indicators carefully since they determine how the crypto trading bots monitor the market and make trade decisions. The bot executes trades once the market conditions align with your predetermined parameters.

Since automated crypto trading bots have direct access to your crypto assets and can make trades on your behalf, you must restrict your API on what actions bots can take and only use bots you trust. Moreover, you need to backtest your trading strategy under different market scenarios to increase the chances of it generating a profit in the live markets.