The diverse nature of the crypto industry allows all types of investors to make money and achieve success. Many experienced retail traders prefer using crypto auto trading techniques to optimize profitability and manage risks. It is a great instrument capable of dramatically improving any strategy in terms of execution and consistency.
While many people talk only about advantages of using an ATS (automated trading system), newcomers should be aware of the downsides of using automation.
Advantages of using automated trading
All digital crypto assets are speculative financial instruments since they do not have any real assets behind them. A Bitcoin is a representation of value that other people put in it. If the market collectively believes that a BTC should be priced at $1 million, it will be. The faith of the financial world makes it so powerful and stable despite not having anything to back it up.
Technically, the proof-of-work mechanism should counter this issue, but the reality is that all the work put into solving complex mathematical problems does not generate any value or products. Without the faith of the community in the coin, it would be wasted electricity.
When the market is speculative, technical analysis is the only worthwhile approach to forecasting market changes. The best thing about technical analysis is that it has strict rules, operates on actual market data, and can be fully automated or produce signals for trading bots.
Let’s talk why this approach is beneficial for retail traders.
Algorithmic trading is great for the crypto market
One of the biggest upsides and downsides of the cryptocurrency market is that it operates around the clock. For some people, it is a great thing since they can make money whenever they like. For others, it is just an ocean of missed opportunities.
Here are some reasons why bots will work excellently in this environment:
- A machine does not need to eat, sleep, or rest. All physiological processes that make retail traders miss out on valuable entry points for market positions have no impact on a bot. It will not skip a beat and work 24/7.
- Robots can effortlessly switch between exchanges. You can run several bots for each exchange. It is important because some CEX platforms are more active during certain periods. The largest crypto markets are in North America and Asia which are separated by several time zones.
- Bots make decisions without any hesitation. It is hugely important for trading strategies that rely on quick decision-making and order execution. Day traders and scalpers know this better than anyone else.
You can remove the human factor
We all have psychological factors that affect our judgment. Human factor is an issue for all types of processes and operations. Humans make mistakes due to being tired, agitated, stressed, or otherwise emotionally distressed. Bots do not have lapses of judgment and follow their instructions to the letter without a fail.
Here are some of common human errors that bots never make:
- Hesitation under pressure. Scalpers and day traders regularly encounter situations where an entry point seems underwhelming or unreliable despite strong signals from indicators. If you have a consistent strategy, you should always take these risks and hope that the net result will be positive over a series of trades. However, many traders hesitate. Bots do not.
- Making mechanical errors. It is possible to misclick or use incorrect values for a market position when you do it manually. When every second matters, it is quite easy to make a huge mistake and ruin a perfect opportunity to make money. Trading bots never do this.
- Slow reaction and execution speed. It is, yet again, relevant for scalpers and day traders. It is possible to be outpaced by the market if you fail to open a market position in time. Your internet connection, equipment, and even body can delay a moment when your order makes it to the market. Bots react instantly while good exchanges instantly execute orders.
A great tool for risk management
Any investor should use portfolio diversification techniques to avoid financial ruin. The best way to balance a portfolio is to have your main source of income and hedge any risk that comes with it using something that can counteract results of your bad trades.
Strategic resource allocation is something that many financiers know very well. You cannot diversify within the cryptocurrency to the same degree as conventional investors, but you can still use automation to hedge some risks.
- Safe strategies like arbitrage can be great to offset risks generated by more aggressive trading systems that have a huge potential but carry a greater risk for your portfolio.
- You can focus on a specific asset and have long positions while allowing bots to create a series of short positions on correlated undervalued assets.
- GRID is a great way to introduce some consistency to your portfolio. Risks and rewards can be adjusted according to the current structure of assets.
Disadvantages of automation
Despite apparent benefits of using automated trading strategies, many people still think that automation is not the best answer to many challenges that investors face during the decision-making process. Many avoid the crypto industry altogether because they do not see the value of traditional approaches like extensive market research and fundamental analysis when applied to the cryptocurrency market.
It is true that you have to use only technical analysis when trying to predict price action in the crypto market and it is one of the glaring issues with using automation that relies only on indicators and signals from sophisticated strategies.
There are other apparent downsides to the whole idea of automation.
The learning curve is quite steep
While you can easily get started and set up a decent automated trading system that will incorporate consistent market monitoring, price action analysis, and more, it still requires time and effort to master the wide range of tools available to retail traders interested in automation.
You need to understand the limitations and advantages of technical analysis, practice in using technical indicators, experiment with various setups, theorize based on your existing knowledge, and otherwise improve your analytical skills. On top of that, you will have to learn some programming and scriptwriting.
Security risks are a big concern
Platforms themselves are usually quite secure. You can further protect your personal data and capital with two-factor authentication and verification. The problem is that you will have more potential vulnerabilities in your portfolio.
Just to run an advanced automated trading system, you will need to have accounts on three separate platforms (here are some examples):
- WunderTrading for running scripts and preset automation solutions.
- TradingView for strategy building and signal generation.
- Binance or KuCoin (or any other CEX platform) where you will be trading.
These are three different services that must have excellent, impenetrable security to ensure that your personal information or money is safe. Since many centralized exchanges had issues with security in the past, you expose your portfolio to additional risks by adding more platforms to the mix.
In conclusion
Automation can be wonderful when used appropriately by people who understand the benefits and risks of implementing it into their trading strategies. It is also quite hard to run a good crypto trading strategy without using any form of automation.
