Automated Crypto Trading: The Ultimate Guide

MORITZ PUTZHAMMER

30 March 202210 min read

Table of contents

As the headline of a New York Times article put it, “We’re all crypto people now.” While Bitcoin and other cryptocurrencies may have started out as the domain of techno geeks and cypherpunks, they now seem to be on everyone’s lips. With institutional and individual investors clamoring to spot “the next big thing” and misfits and millionaires attempting to reinvent the monetary system as we know it, broad interest in the cryptocurrency market continues to surge. And with that surging interest comes a greater awareness of trading tools that traders can leverage for greater efficiency and profits.

However, investing in cryptocurrency can be difficult, even arcane for newcomers, who are now often seen as latecomers to a movement with street cred and increasing mass appeal. First, there are the sheer numbers of coins—over 18,000 and counting. Then there is the considerably steep tech learning curve for most people, who are used to simple user interfaces with minimal user input. And we haven’t even begun to consider the lack of a clear regulatory framework for the buying, selling, trading, and taxing of cryptocurrencies globally.

Even when the market moves sideways or, worse still, “dips,” there are countless possibilities for making money in the cryptospace, but there is one clear way to lose it (and fast): by trading manually. In the following article, we’ll look at the many advantages of using algorithmic trading when trading cryptocurrencies. Virtually no one today should be trading manually, a point that will become increasingly clear by the end of the article.

What is Automated Crypto Trading?

Well, there’s the obvious answer: trading that is automated. But that doesn’t get us very far, does it? The longer answer, then, involves a brief look into the history of automated trading in search of a basic understanding of its emergence and development within financial markets and why it’s important for traders today.

Although the tech behind automated trading is cutting edge, the practice of automated trading dates as far back as 1949, when American Richard Donchian launched Futures, Inc., one of the first publicly held commodity funds. Remarkably, Donchian used set rules to generate buy and sell signals. Fast forward to the present and as much as 80% of trading on the stock market is done with algorithmic-based automated programs.

The term “automated trading” is often used interchangeably with other terms such as copy trading, algorithmic trading, bot trading, black box trading, and robotic trading, but distinctions can and should be made.

Quite simply, automated trading is when a trader uses an automated system to implement trading rules that would normally be executed manually. A good example of this is a process known as dollar-cost averaging (DCA). As Investopedia defines it, dollar-cost averaging is “an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals.”

Of course, you can do this manually, setting aside a fixed amount to be invested at specific intervals. But what happens when this schedule conflicts with, say, your holiday plans? Or maybe the market has changed substantially and you’re having second thoughts about investing under the circumstances. A process like dollar-cost averaging works well when it’s done consistently, but all of us are prone to trading inconsistently out of fear, overconfidence, or simply busy schedules. The solution is to automate the process to ensure consistency, reliability, and efficiency.

Automated trading works in a similar way. Rather than trying to time the market, which is virtually impossible since crypto is traded 24/7/365, automated trading allows traders to use a platform (or program) that executes predefined rules for trade entries and trade exits. Typically, these predefined rules will result from technical analysis, among other things. Automated trading is being used today in day trading, swing trading, and position trading.

Algorithmic Trading and High-Frequency Trading

Closely related to automated trading, but with a slight nuance, is algorithmic trading, which is an automated trading system in which the trading rules are decided using an algorithm or mathematical formula.

Once again, Investopedia provides a clear and concise definition: “Algorithmic trading is a process for executing orders utilizing automated and pre-programmed trading instructions to account for variables such as price, timing and volume.” For those who don’t quite know what an algorithm means or how they function, the article continues:

An algorithm is a set of directions for solving a problem. Computer algorithms send small portions of the full order to the market over time. Algorithmic trading makes use of complex formulas, combined with mathematical models and human oversight, to make decisions to buy or sell financial securities on an exchange.

In addition to order execution, arbitrage, and trend trading strategies, algorithmic trading can be used for high-frequency trading (HFT), which is “a type of algorithmic financial trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.”Another way of putting it is that high-frequency trading is a specific set of trading strategies that are sensitive to trading latency and slippage. While many believe that positions in high-frequency trading are held for a long time, this view is something of a misnomer. Rather, the practice is more about needing very up-to-date data and making quick decisions based on said data, rather than the actual holding times of the positions themselves.

Advantages of Automated Crypto Trading

Algorithmic trading with crypto trading bots provides a range of benefits, especially when trading popular cryptocurrencies such as Bitcoin or Ethereum, and these benefits can result in a substantial increase in profitability when compared with manual trading. As Forbes has reported,

Bots allow traders to successfully trade and monitor their positions using customizable parameters without having to be glued to their screens the entire time. Further, the human emotional error aspect and an inability to compete with bots in the concurrent monitoring of assets on multiple exchanges has led to their further proliferation in the industry.

Below is an overview of some of the most important benefits to be gained from using automated trading.

Consistent trading discipline

No more missed trades or missed opportunities. As its name suggests, automated trading ensures that trades are executed consistently, reliably, and accurately. By automating the trading process according to predefined trading rules, bots ensure consistent trading discipline. They’re also able to optimize long-term performance without the short-term costs of human intervention. In fact, the Wall Street Journal has written that your most valuable investing tool in 2022 could be discipline. And discipline is nothing more than taking a structured approach to your financial decisions rather than just using gut feelings to guide how you act. And automated trading provides that discipline instantaneously and consistently.

Emotionless trading

FUD (fear, uncertainty, doubt), FOMO (fear of missing out), HODL (hold on for dear life)⁠—the cryptosphere is full of acronyms and a lot of them are associated with human emotions (especially fear). And there’s a very good reason for it. The cryptocurrency market is a highly volatile one in which it’s not uncommon for a coin to lose 30% of its value in a single day! Good luck keeping your cool during the next Bitcoin “dip,” which is the subject of some of the funniest cryptocurrency memes. By automating your trading strategy, you avoid making irrational decisions based on fear, impulse, or greed, which can be costly!

As Forbes advises, “Irrespective of whether you trade under fear or greed, there are chances of your experience going sour. A bad experience, especially during formative trading days, can act as a dampener and turn you off markets once and forever. Many investors have turned their back on markets following a not-so-good experience, thus robbing themselves of the opportunity to maximize their wealth.” Whether good or bad, emotional trading clouds your judgement, impacting your bottom line.

Higher trading speed

You’ve heard the old saying that time is money, and automated trading using crypto bots is exponentially faster than any human trying to time the markets. The order of magnitude is so great as to beg the question: why would any individual trader ever consider trading manually? It’s stressful and it’s often futile. Just ask Apple co-founder Steve Wozniak, who cashed out his Bitcoin stash because he got tired of constantly checking the price: “I had bitcoin to experiment with and when it shot up high, I said, ‘I don’t want to become one of those people that watches it, watches it and cares about the number.’ I don’t want that kind of care in my life.”

An automated trading strategy can execute millions of computations and thousands of transactions across various time zones and markets almost instantaneously. Trades happen in a fraction of second⁠—far faster than anything an individual trader can accomplish. It really is that simple. The takeaway? Don’t be like Steve Wozniak. Trade faster, smarter, and more profitably by automating your trading strategy.

Backtesting and paper trading

British mathematician Clive Humby coined the phrase “data is the new oil.” Within the world of automated trading, backtesting and paper trading provide the valuable wells of data, which can offer tremendous insights for savvy traders willing to leverage that data to maximize profits.

Countless articles have been written about the importance of targeted backtesting. Take this one, for example, from Forbes: “Backtesting also allows you to analyze the index along a number of different lines. For instance, how does it perform at radically different timeframes? What are its volatility characteristics? How do different versions of the index’s weighting methodology perform when compared against each other?”

In fact, one of the most important features of automated trading strategies is the ability to test one’s setup based on historical and live data without having to put any of your hard-earned cash or coin on the line. Try before you buy. By using Trality’s powerful backtesting and paper trading tools, you benefit from the power and insights of historical data, and can therefore better predict how well (or poorly) a particular trading strategy is likely to perform.

Risk management

Crypto markets can be very volatile, and trading bots can help to minimize risk. By helping to hedge against market crashes or dips, automated trading can spread your tokens across multiple strategies and exchanges. We all know that cryptocurrency markets can be highly volatile, which is why a prudent trading strategy should include risk diversification. One way to diversify your risk is to run multiple trading bots. And while a diversified portfolio is certainly not foolproof, it can balance risk and reward in order to reduce exposure to any one particular asset. Age-old advice that still rings true with cutting-edge technology like trading bots.

Disadvantages of Automated Crypto Trading

With the good comes the bad. Despite its proven benefits, automated trading does present a number of things to which every trader should pay attention, and we would be remiss if we didn’t underscore some of them.

Over Optimization

While backtesting and paper trading are crucial, traders can run the risk of developing a trading strategy that looks good on paper but performs terribly under live trading. As Jean Folger of Investopedia warns,

Over-optimization refers to excessive curve-fitting that produces a trading plan unreliable in live trading. It is possible, for example, to tweak a strategy to achieve exceptional results on the historical data on which it was tested. Traders sometimes incorrectly assume a trading plan should have close to 100% profitable trades or should never experience a drawdown to be a viable plan.

By all means, optimize your trading strategy, but don’t overdo it.

Mechanical Failure

Power outages, computer problems, server issues, slow internet—mechanical problems can and do happen. Automated trading is fast, efficient, and profitable, but it isn’t infallible. Even the most robust system or computer can crash, which is why it pays to expect the unexpected in the unlikely event that your algorithm can no longer run as it should.

Automated, Not Automatic

Many mistakenly believe that automated trading is automatic, requiring little input or monitoring on the part of the trader. In fact, the opposite is true. Although rare, system anomalies can result in errant orders, missing orders, or duplicate orders, which is one reason why traders should monitor their automated trading strategy to ensure that it is running correctly.

Automated Crypto Trading—How It Works

Since they communicate directly with crypto exchanges and place orders automatically based on a trader’s predefined parameters, crypto trading bots offer unparalleled speed and efficiency, fewer errors, and emotionless trading.

In order to trade on an exchange such as Binance, a trader must authorize a trading bot to access their account via API keys (Application Program Interface). Crucially, this access can be granted or withdrawn at any time.

There are three essential stages in terms of how automated trading actually works: signal generator, risk allocation and execution.

  • The signal generator does the work of the trader, making predictions and identifying possible trades based on market data and technical analysis indicators.
  • Risk allocation is where the bot distributes risk according to a specific set of parameters and rules set by the trader, which usually includes how and to what extent capital is allocated when trading.
  • Execution is the stage in which cryptocurrencies are actually bought and sold based on the signals generated by the predefined trading system. Here signals are converted into API key requests that a crypto exchange (such as Binance) can understand and process.

Simple, right?

Automated Crypto Trading with Trality

We’ve put together a straightforward guide to building your first or next automated trading system using Trality’s powerful, innovative, and flexible platform and tools.

Whether you’re a casual trader, a python guru or a complete beginner, Trality provides a comprehensive array of user-friendly tools to help you trade faster, smarter, and more profitably.

With our easy-to-use UI/UX, you can create, backtest and trade like a professional in no time. Lost when it comes to coding? Check out our Rule Builder and create flexible bots using boolean logic (no coding is required). Its graphical user interface lets you build your trading bot’s logic by dragging and dropping indicators and strategies. You can also choose from a variety of predefined strategies that you can customize to your liking right away.

Advanced users rave about our Code Editor, the world’s first browser-based Python bot creation tool, which comes with a state-of-the-art Python API, numerous packages, a debugger and end-to-end encryption. Additional benefits include accessing financial data with our easy-to-use API as well as access to a full range of technical analysis indicators.

Conclusion

As the number of cryptocurrencies continues to explode, along with traders’ expectations for steady portfolio growth, the pressure to improve trade execution performance will increase as well. And as more and more traders enter the cryptosphere, it will become increasingly difficult to sustain steady profits without using powerful tools such as automated trading.

Whether you're interested in investing in the best cryptocurrencies, want to know more about crypto market cap, or curious about the future of cryptocurrencies, a successful trader is an informed one, which is why it's so important to read widely and do your own research. And since time is a premium, staying up to date is easy with the latest podcasts.

As we gaze into the future, we can even see a situation in which core algorithms will become increasingly more intelligent and reactive to market conditions, even to the point where traders will be able to harness the power of automated trading to expand their strategies across asset classes (even to things such as cross-asset automation).

There’s no time like the present to leverage the power of automated trading. Start your journey with Trality today!