Crypto trading bots are software tools that allow investors to automate their trades according to a set of programmable rules. They help investors to remove their emotions from trading scenarios and execute strategies without compromise. Trading often involves sitting in front of a chart all day to observe price fluctuations. However, traders can use historic price data to create trading strategies. These strategies allow traders to establish parameters or rules that are programmable into crypto trading bots. Furthermore, traders can program bots to buy and sell assets under specific market conditions, such as when the price increases or falls by a predefined value. That said, programming crypto trading bots requires a firm understanding of technical analysis. So, if you’re one of the many traders wondering, “what are crypto trading bots?” or “how do crypto trading bots work?” – read on!

In this article, we’re going to dive deep into the world of crypto trading bots. We’ll explore how technical analysis works and how it can be applied to automate cryptocurrency trades. Also, we’ll discuss the differences between technical analysis and fundamental analysis. Plus, we’ll explore some of the different types of trading bots available. Furthermore, we’ll address common questions around trading bots, such as “what are crypto trading bots?” and “how do crypto trading bots work?”.

What is Technical Analysis?

Before we dive into crypto trading bots, let’s first look at the discipline that informs the strategies these bots automate. Technical analysis is a series of techniques that investors and traders use to create strategies. The discipline involves analyzing historical data, such as asset prices and trading volumes, to identify potential investment opportunities and trends. Investors can map trend lines and trading patterns on a chart to establish the probability of specific market dynamics occurring. Although the discipline is not exact, it helps investors to understand how the markets behave.

Technical analysis is often used in conjunction with fundamental analysis. Fundamental analysis involves studying market sentiment and evaluating the price of an asset in the context of current events and the financial well-being of an organization. However, technical analysis uses data, statistics, and probabilities to determine the likelihood of any given scenario occurring.

Furthermore, investors use technical analysis to assess the supply and demand of an asset and how they could inform the price and trading volume. Strategies often use trading signals, patterns, indicators, and charting tools. Plus, they apply to practically any asset class with a chartable price history.

Trading Indicators and Chart Patterns

Trading indicators are mathematical calculations that are visualized on price charts in the form of lines and patterns. They help users to forecast trends and establish the probability of certain price movements playing out in the markets according to historical probabilities. Common trading indicators include support, resistance, moving averages, trendlines, oscillators, and channels.

How to Trade Chart Patterns with Target and SL - Forex GDP

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Technical Analysis vs Fundamental Analysis

Investors use several forms of research and analysis to understand market sentiment. However, technical analysis (TA) and fundamental analysis (FA) are two of the most prominent disciplines that investors employ regularly. Whether you’re involved with the currency markets, securities, commodities, or cryptocurrencies, you’ll likely benefit from incorporating a combination of these techniques into your forecasts and strategies.

TA tends to look at hard data and assumes that any external factors that could affect the price of an asset are already accounted for on the charts. On the other hand, FA aims to determine the intrinsic value of an asset irrespective of what the price charts say. Moreover, a fundamental analyst may look at the broader socio-economic landscape to assess the performance of a company or crypto project, while a technical analyst focuses on the charts and statistics that inform their calculations and forecasts.

On-Chain Analysis

Before we address the question of “what are crypto trading bots?” and discuss how technical analysis is used to program them, one more type of analysis deserves a mention. While technical and fundamental analysis can be applied to just about any asset, on-chain analysis is unique to the crypto markets. 

On-chain analysis explores the activity of blockchain networks and cryptocurrency transaction data to generate a range of metrics. For example, on-chain analysis can be used to observe the flow of crypto assets into and out of exchanges. Also, investors can apply on-chain analysis to determine the average holding duration for crypto assets and the average number of tokens in wallets. 

Save our “How to Invest During a Crypto Bear Market” article for later reading to learn how to navigate market downturns!

What are Crypto Trading Bots?

So, what are crypto trading bots? Crypto trading bots are software programs that automate trades according to predetermined criteria. Also, trading bots use artificial intelligence (AI) to minimize error and the need for manual operation. Although trade automation is common in most markets, crypto trading bots take advantage of the markets being open around the clock. Most markets tend to cease trading during the evenings and on weekends. However, the crypto markets never sleep, making them an ideal place to set up trading bots.

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Crypto trading bots allow users to make money in their sleep. However, they generally require a firm understanding of technical analysis. Some advanced trading bots require users to be able to program their trading strategies. On the other hand, there are several crypto trading bots available that only require a modest technical ability.

Trading bots are essential tools for professional traders. They allow users to minimize risk, backtest strategies, and maximize profits. When creating a trading bot, programmers select specific parameters about how the bot will automate trades. For example, someone could program a crypto trading bot to buy a token at a specific price if the trading volume is within a particular threshold or the asset is oversold. Likewise, users can program bots to sell an asset when two moving averages meet or when an asset has pumped by 10%. Moreover, crypto trading bots help investors to remove their emotions from the equation and execute trades based solely on the rules and conditions they stipulate.

How Do Crypto Trading Bots Work?

So, how do crypto trading bots work? Many different bots exist to suit a range of investment strategies, risk appetites, and automation preferences. However, many trading bots share common features. For example, you’re likely to find some sort of data analysis module within most trading bots. This module allows the bot to interpret market data from multiple sources and is the foundation on which most buy and sell decisions are made.

Furthermore, most trading bots feature a module that helps them to establish market risk. This data helps traders to determine how much capital they should allocate to any given trade. Additionally, many trading bots feature a module that interacts with application programming interfaces (APIs) when buying and selling assets. This part of the bot allows traders to spread their purchases efficiently when buying large volumes or buy quickly when the time calls for it.

Blog - How Do Crypto Trading Bots Work?

While some trading bots allow users to create complex automations, others offer a simple feature set. This often depends on how the trading bot is used and the strategies they aim to implement. So, now that we’ve addressed the question, “how do crypto trading bots work?”, let’s take a moment to consider the various types available and the different strategies they cater to.

Different Types of Crypto Trading Bot

Although most trading bots share common features, there are several specific types of trading bots available to suit different styles of trading. For example, arbitrage bots allow users to profit from the price differences of assets between platforms. When tokens trade on one exchange at a higher price than another, it allows arbitrageurs to capitalize on minor price imbalances.

Furthermore, coin lending bots allow users to automate the lending of crypto assets to margin traders. When this occurs, borrowers pay back their loans with interest, making it a viable option for earning a passive income with crypto. However, coin lending bots require a significant amount of programming to define the parameters of an investment strategy. Nonetheless, these bots present a low-risk option for investors as crypto assets cannot be transferred to an external wallet.

Leverage bots are another example of the various types of trading bots available. Leverage trading, also known as margin trading, involves borrowing capital from a third party to increase a position size. Automating leverage trades is one of the riskier ways to use a crypto bot, so always be sure to exercise caution and conduct your own research before using them.

Additionally, market-making bots allow users to provide liquidity to the crypto ecosystem and capitalize on the price differences between bid and ask prices (spread) on exchanges. However, the technical trading bot is the most common type of crypto trading bot. Technical trading bots use a range of technical indicators to help users automate trades and maximize profits. Some technical trading bots also feature social trading and third-party trading signal integrations.

Pros and Cons

Now you’re familiar with the different types of crypto trading bots, and we’ve addressed the question, “how do crypto trading bots work?”, let’s take a look at some of the benefits and drawbacks they present. Crypto trading bots can help investors to make profits while they sleep and remove emotions from their trades. A profitable trading strategy can be put to work and forgotten about using a trading bot, requiring minimal human intervention. However, crypto trading bots require a strong knowledge of technical analysis. Also, bots are only effective when configured appropriately.

If you have already implemented effective trading strategies using technical analysis and you have an understanding of computer programming, automating them could help you to optimize your trades. However, if you don’t understand how to create trading strategies and are yet to wrap your head around technical analysis, it’s worth familiarizing yourself with these concepts before jumping into making trading bots.

On the other hand, some crypto trading bots remove a lot of the complexities away from algorithmic trading. However, these ready-to-go algorithms are often too costly for beginners and still require a strong grasp of technical analysis.

If you want to learn how to automate your trades and backtest your trading strategies, check out the Algorithmic Trading course at Moralis Academy. In this course, we teach students everything they need to know to build their own crypto trading bots. Also, we help students to manage risk and create effective trading strategies using technical analysis. Join our community of over 60,000 students and take your trading game to the next level today with Moralis Academy!

How Do Crypto Trading Bots Work? – Summary 

Crypto trading bots are essential tools for automating trades, reducing risk, and maximizing profits. There are many reputable crypto trading bots available that allow users to implement multiple strategies, participate in social trading, and integrate third-party trading signals. Though the “set-and-forget” mentality may apply to some crypto trading bots, users need to monitor their trading bots’ performance and adjust their strategies’ parameters accordingly. 

Crypto trading bots are not magic bullets; they require a thorough understanding of technical analysis to be profitable. However, when used effectively, they can give investors an edge over their competition. Moreover, trading bots allow investors to remove their emotions from trades and execute their strategies with precision. Now that you’re familiar with the concept, you should be able to answer confidently the next time someone asks you, “what is a crypto trading bot?” or “how do crypto trading bots work?”.

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