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9 Best Practices For Using Crypto Trading Bots - The Ultimate Guide

 

By Nerly Shammah Nov 20, 2023

 

If you could earn 1.23% of your invested capital daily, how would you feel? 448.95% ROI is surely a mouth-watering yearly profit. 

 

 

Bitsgap is a popular trading bot used by over 500,000 traders and it boasts of an average of 1.23% daily profit on investment. Care to bite? This article is intended to guide you on what you should know before using crypto trading bots like this - effectively, to ensure maximal profits and prevention of losses. 

 

 

Understanding Crypto Trading Bots 

 

Crypto trading bots offer a robust approach to crypto trading that takes away human limitations and emotions via autonomously executing programs designed to maximize profits.

 

Popular amongst institutional traders, crypto trading bots are an efficient way for traders to minimize asset risks and maximize profit-making in crypto trading. Bots are computer programs that execute various predefined algorithms. These algorithms are also known as “strategies, parameters or protocols” by which these bots are expected to function. 

 

By using crypto trading bots, traders can take away the emotional attachments in trading and prioritize developed strategies, effectively ensuring a much more predictable trading outcome.

 

There are various types of crypto trading bots but the most common include:

 

● Arbitrage bots - designed to take advantage of price differences of specific assets across various trading pairs on the same market/exchange or across different exchanges. 

 

● Trend following bots - designed to monitor and follow momentums in the crypto markets. Trend-following bots assume a trend will continue and trade to maximize profit in the continuity of the market trend. 

 

● ​​​​​​​Scalping bots and market makers are other popular types of crypto trading bots. In 2022, a specific type of bot called “Sandwich Bots” hit the news headlines for the millions of dollars it made trading across crypto markets. 

 

Sandwich bots typically watch markets across blockchain networks to find traders who are about to perform a trade on the network and front-run the trade by buying up the assets involved in those trades in hopes of increasing the asset’s market value and therefore profit by selling it to the trader mentioned. 

 

This method raked in millions, if not billions of dollars to the bot operators according to multiple news sources.

 

Fun Fact: Crypto trading bots are generally named after their trading strategies. 

 

Crypto Trading Bots Best Practices

 

One of the mistakes people make when using crypto trading bots is that they jump at it without any basic knowledge of how it works and, thus, do not understand that it isn't a magical beast that can just print money from the crypto markets. The following are the best practices to follow when using crypto trading bots. 

 

1. Understanding Crypto Trading At Both The Basic and Advanced Levels

 

Before using a crypto trading bot, it is important to have a basic knowledge of trading. This includes having the knowledge of the nature of the assets you're trading, and how their various blockchains and ecosystems coupled with their economies may affect your trading practices. 

 

With the knowledge of these assets, proceeding to learn the technical aspects of asset price movements in the markets is important. This technical knowledge generally exposes you to various ways of observing trend patterns with the ability to connect several datasets to attain theories on market momentum. 

 

2. Test Out Your Knowledge With Manual Trading

 

You shouldn't skip manual trending, it is important as a beginner. Manual trading gives you an oversight on the effectiveness of your acquired knowledge applied in your trading strategies. By attaining some success, you can determine if using a crypto trading bot would be good to up the efficiency level of your trading and eradicate human emotions that can be a limitation and factor that causes losses. 

 

Some crypto trading bots like 3Commas give you a Demo account to test out your strategies. 

 

3. Choose The Best Crypto Trading Bot

 

Most traders do not have the skills to write their own trading bot program, this leads to the use of commercial trading bots that are based on subscriptions paid to the companies that develop and maintain these complex programs. 

 

To ensure minimal asset risk and higher “potential profits”, it is important to carefully choose the right trading bot. But the big question here is: how do you know what's the best? 

 

Research, this is the first thing anyone new to this system should do. By digging through public resources like guides, reviews and case studies of these trading bots, it would be somewhat easy to choose which is right for you. 

 

4. Explore Your Bot’s Customization Options

 

Usually, from your research, you should have been able to determine what bot has more customization options and supports a larger number of exchanges. This is particularly important for people who want to engage in arbitrage trading across exchanges largely.

 

5. Read Your Bot’s Terms Of Service To Determine Its Security Prioritization

 

Terms of service? Yes! I know, it's often too long and vastly boring, but this is the 21st century, and it is important to always read the terms of service of any product or service you opt to use. 

 

Within those long texts are very important details that can make your journey smooth or hell, depending on whether you read and understand them. 

 

6. Practice Several Backtesting

 

Having checked all the boxes and now you're ready with a trading strategy to make those dollars, it is important to not jump into it but practice backtesting. 

 

Don't know what that is? 

 

Backtesting is testing a trading strategy or algorithm using historical market data to evaluate its performance. 

 

By backtesting your strategies, you assess how they would have performed over a past period. The objective of this is to simulate how the strategy would have executed trades, factoring in historical price movements and other relevant market conditions.

 

The application helps you attain insightful data on how your strategies would have performed through past “real market” movements. Some traders couple this with forward testing to determine if there has been a change in trend movements, this usually helps discover when various financial markets enter new or different market circles. 

 

Using the performance metrics obtained from this practice, you can analyze your returns, risk-adjusted returns, drawdowns, and other relevant indicators to evaluate the effectiveness of the strategy.

 

Based on the results of the backtest, you may optimize your strategy by adjusting parameters or rules to improve its performance. Notwithstanding, it is important to avoid overfitting the strategy to historical data, which might not accurately represent future market conditions, this is why forward testing is vital as well.

 

7. Deploy your bot with your tested strategies

 

At this point, you should have gathered enough data to define a trading strategy with a low-risk profile to increase your chances of making profits. 

 

You can also surf the marketplace of these trading bot platforms for strategies as there are numerous professional traders posting their trading strategies with all the important performance metrics to decide if it's a good strategy to copy for your trading practices. 

 

 

8. Manage Risk and Uphold User-Side Security

 

Risk management is pivotal for long-term effective trading practices. Proper position sizing, setting stop-loss orders, and implementing other risk controls are essential components of best practices. 

 

In addition, to ensure the security of your trading account and assets, it is important to safeguard your API keys which enable you to connect your trading bots to your exchange accounts. 

 

Security measures like implementing two-factor authentication are imperative to protect trading accounts from unauthorized access and potential cyber threats.

 

9. Learn And Optimize 

 

You can't learn and know it all in a day. Continually learning from experts and optimizing your trading strategy can ensure long-term sustainability and profitability. 

 

The Growing Importance Of Crypto Trading Bots And Need For Understanding Best Practices

 

The growing importance of crypto trading bots stems from their ability to enhance efficiency in crypto trading, reduce emotion-based decision-making in trades, and operate/execute trades autonomously in the 24/7 crypto markets. As the cryptocurrency landscape evolves, understanding best practices becomes crucial to harness the benefits while mitigating risks associated with automated trading.

 

While crypto trading bots offer significant advantages, understanding and adhering to best practices is essential for maximizing benefits and navigating the complexities of the cryptocurrency markets responsibly. The risks of not following best practices include loss of asset accounts and assets, poor trading results and generally a waste of time and resources.

 

To effectively navigate the world of automated trading and profit alongside numerous individual and institutional traders, leveraging smart trading bots and upholding best practices are crucial.

 

Are Crypto Trading Bots Safe To Use? 

 

Yes, crypto trading bots are safe to use. Over 751,222+ users already use crypto trading bots like Cryptohopper and over 500,000 users use Bitsgap and reportedly make an average of 1.23% of their invested capital daily. 

 

Who should use a crypto trading bot? 

 

Anyone interested in automating his trading practices and prioritizing sticking to developed strategies should opt-in to use crypto trading bots.