The Pitfalls of Automated Trading and How to Avoid Them

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Algorithmic trading has been around for more than 40 years, with its origins in the 1970s on the NYSE. Machines can run 24 hours a day, have no feelings, and can monitor market data for hundreds of trading pairs on several markets at the same time. According to JPMorgan report, manual trading accounts for just 10% of overall turnover on conventional markets such as the NYSE. The algorithms do the rest. The cryptocurrency industry would undoubtedly follow suit, since most professional traders and investment funds have a history of conventional assets.

Although algo trading accounts for 90% of all transactions, the vast majority of private traders continue to use exchange terminals and trade manually. Trading robots have often been costly, difficult to build, and necessitated specialised technological experience to begin with. They still required a dependable cloud system. However, as cloud technology advances, an increasing number of vendors are offering their algorithms as a service. Simply Google “automated crypto trading” or visit the websites of Cryptohopper, 3commas, and TradeSanta.

Users of such cloud applications only need to register online, set up their trading criteria using a reasonably simple gui, and unleash the bot. Or 100 bots, if they choose. The link between the trader’s exchange account and the cloud bot is made possible by the API access function, which is supported by all major exchanges. After they have been configured, crypto trading bots can operate 24 hours a day, seven days a week, according to the rules that the user has specified. Trading volumes reportedly rise 20-50 times as compared to manual trading. Profit prospects can also expand. Sounds like a winning combination, doesn’t it?

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Successful cryptocurrency bot trade:

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In the real world, new chances to gain more often come with increased risks of losing more. Algorithmic trading has its own set of issues that must be addressed. For example, there is a chance that a bot account will be compromised and API keys stolen, that bot settings will be incorrect, that an algorithm error will result in losses rather than gains, that abrupt crypto price fluctuations will occur, and so on. Traders can end up losing money or purchasing a big position in a low-liquidity token.

Unsuccessful cryptocurrency bot trade:

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Based on my trading experience with different crypto bots and networks, here are a few general guidelines for getting started with bots if you wish to give them a shot:

  1. NEVER trust “black box” bots who promise you income after depositing your crypto into their “smart contract”. Real bot will operate only through your account on well known cryptocurrency exchange. You should be able to see all trades and orders of your bot. Your API keys should NOT allow bot to make withdrawals from your exchange account. Permission to make trades is absolutely enough for all common strategies.
  2. ALWAYS cap your risk. Register new account on your exchange. Doing so you limit your worst-case losses to the amount, allocated in this account.
  3. Start small. Minimum order on most exchanges is roughly equal to $10 value. It’s enough to have 10-20 orders deposit value to try the crypto trading bot.
  4. Play safe. Trade only high volume pairs from Coinmarketcap. Let’s say, TOP-10 will be the wise choice. They have enough volatility to let bots do their job and enough liquidity to close your position if you’ll need it.
  5. Be conservative. Don’t try to catch every market movement setting low levels for bot triggers. Let’s say 1% to 5% should works well for the most beginners. It means that market price should move for at least 1% for your bot to make one trade.
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If, against all precautions (or because you ignored them), your cryptocurrency bot ends up buying so many coins during the rapid market downturn, you should try either of the following:

  1. Fix your loss. Stop your bot, sell coins manually. Pro – you’ll immediately release your funds for a future trade. Contra – you’ll lose your option to recover this exact trade.
  2. Keep waiting. Probably, the market will hit your take profit order and the bot will finish its job successfully. Pro – you still have chances to earn from this trade. Contra – this may never happen, cryptocurrency market can go deeper and never recover, your assets are kept frozen in an unwanted deal.
  3. Launch another bot in the “opposite direction”, so it will sell purchased coins during market growth. This can be considered as a compromise between first two options. Probably the bot will not sell all coins with profit, but it can step-by-step reduce your position.
  4. Stop the bot, buy more position of your trade, reduce the average purchase price doing so. Then try to sell your position with profit on a lower level. This option is the most risky and is not recommended to anyone without proper trading experience.
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Crypto hodlers, unlike conventional funds, cannot receive dividend payments from their portfolio. As a result, automated trading can provide an opportunity to benefit from crypto market fluctuations without investing additional funds. Cloud algorithmic trading is a new development that began in late 2017. It will be beneficial for both cryptocurrency investors who will be able to gain more and cryptocurrency exchanges who will be able to dramatically raise their liquidity and volumes. Still, of course, think about all the risks before you try!

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