Three reasons you need to avoid cryptocurrency trading bots

Trading around the clock might seem appealing, but cryptocurrency trading bots have their drawbacks. Here are three reasons you should avoid them

If you’ve been trading in cryptocurrencies for any length of time, you might be tempted to look into using cryptocurrency trading bots. However, there are a few issues with these that you need to be aware of. Beyond possible downtime and slippage, here are three more reasons you need to avoid using cryptocurrency trading bots.

Cryptocurrency trading bots are not for beginners

Using cryptocurrency trading bots requires a vast amount of experience. First of all, no matter how reliable your bot may be, you’ll be missing out on the necessary experience of learning about the market and different styles of trading.

Moreover, the only way to ensure maximum returns when using cryptocurrency trading bots is by having a deep understanding of the markets. This is something hard to achieve in such a volatile space like cryptocurrency, even for those with more experience.

It’s true that unlike people, bots never sleep. So, many traders may be attracted to the fact that they can set their bot to trade 24/7. When the markets move so suddenly and rapidly, this is certainly an advantage.

However, adhering to some kind of “set and forget” strategy is a really bad idea. Traders should always be careful about monitoring their positions. Even the most sophisticated bots can suffer glitches, be open to fraud or security issues, and experience downtime.

Backtesting – You need to finely tune the rules

One of the greatest risks of using cryptocurrency trading bots is that you need to put in some extensive manual work first. In what is known as backtesting, if the rules you set your bot to follow are not carefully refined, you could be in for a major problem.

An inexperienced cryptocurrency bot trader, for example, may set a rule that tells their cryptocurrency trading bot to never buy higher than your last selling price. This is perfectly logical, but the problem here is that this only prevents a buying transaction from occurring.

You need to also add an additional stop rule so that if the market bottoms out, you don’t find yourself stuck with losing positions. In other words, you may have been able to sell before the dip if you had been trading manually.

Most cryptocurrency trading bots allow for setting rules through backtesting. Users can basically input them and then programme the bot to run the rules against historical data.

By doing this, your bot should perform how you expect it to before you set it loose on live trading.

Good cryptocurrency trading bots don’t come cheap

It pays to remember that while there are some free or low-cost trading bots out there, you usually get what you pay for. Most automated bots have a monthly subscription or even an annual fee. This means you could get locked into trading payments long after you’ve decided to take a break from the market.

Also, remember that the cost of running your bot is going to take up a chunk of your profits. When you trade manually, this is not something that you will have to be concerned with.

Cryptocurrency trading bots don’t create good traders. Bots have no market instincts and can’t react to macro factors or announcements (such as rulings from the SEC) that tend to move the markets. You need a human trader for that. Your bot will just carry on executing the rules you have set for it.

Another drawback of cryptocurrency trading bots is that you can’t always use any exchange with them. You’ll have more flexibility over where you trade if you avoid bots and take the traditional manual path.

Take Haasbot or the Cryptohopper software for example. Cryptohopper works with just nine cryptocurrency exchanges. Haasbot is integrated with more, but it still may restrict your needs, depending on where you want to trade.

The takeaway

Cryptocurrency trading bots can eliminate things such as human error, emotions getting the best of us, or adding an extra zero by mistake. They can also allow you to execute trades with greater speed.

However, if you want to trade in highly volatile markets, it’s best to use your head. Cryptocurrency is still highly susceptible to outside pressures and bots are not aware of these.

If you don’t want to find yourself locked into a subscription or a set of rules that you can’t update, you need to avoid cryptocurrency trading bots.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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