Wednesday, October 23, 2019

Robot trading or automated trading

Bot trading or robot trading basically is the use of computer algorithms and systems to trade markets based on specified rules and strategies. It is an automated way of trading in the cryptocurrency market with several advantages. We will discuss those below as well as feature a few leading trading bots in the market at the moment.

Why use bots for trading?

There are several reasons to use a trading algorithm to place market orders. These include:

Speed – bots, unlike humans, are fast and can execute simultaneous orders extremely fast. This will allow a user to take advantage of multiple profit-making trading opportunities as opposed to engaging in the activity manually.

Perpetual trading – the main difference between the cryptocurrency market and the traditional stock market is that with the crypto market, trading is ongoing all day and night. Markets do not close. However, traders have to take breaks every so often to rejuvenate after a long day. Bots can be developed to run perpetually until stopped by the user.

Emotionless trading – this is perhaps the most important aspect of using bots for trading. Traders are vulnerable to making trading decisions based on sentiment and emotions. Sometimes based on other people’s recommendations and they avoid using data and statistics. Bots are not affected by emotions and therefore all trades they execute are purely based on their specified algorithms.

Uses of Bots in Cryptocurrency Trading

There are several uses for bots in any trading market and cryptocurrencies are no exception. Bots have two main uses: Arbitrage and market-making.

Arbitrage involves taking advantage of price differences in different cryptocurrency exchanges. For instance, the price of Bitcoin against Tether on Binance may be slightly higher or lower than the same trading pair on Bitfinex. The differences are usually tiny in the range of 1%, sometimes less or more and these discrepancies usually only exist for seconds. Therefore bots are able to detect these price discrepancies and open trades on the different platforms simultaneously. The gains from a single trade may be as little as a few cents but these gains add up over time.

Market making involves the provision of liquidity to a market by placing simultaneous buy and sell orders on the order book. Market makers typically take advantage of the spreads between the asking and bidding price of different assets on the market and their profit-making does not depend on whether the price of a particular asset is rising or falling. In addition, most cryptocurrency exchanges offer these market makers fees for their services.

Effectiveness of market-making opportunities depends to a large extent the speed of the trader and doing this manually is not really an option. The trader needs to place simultaneous trades to take advantage of the price spreads between the buy and sell sides. Market making bots act as counterparties on the trading platform. The gains from each trade are usually tiny but engaging in the activity long enough will ensure that the trader makes a tidy profit.

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Robot trading or automated trading