Cryptocurrency prices move up and down around-the-clock, which means it’s difficult for traders to seize all of the market opportunities that arise and take action to protect their position during moments of volatility. After all, traders are only human and they do need to sleep.
Hence, so-called crypto trading bots have emerged to help compensate for the limitations of humans, using algorithms to automatically execute trades on behalf of their users.
There are many different kinds of crypto trading bots available to traders today, designed to implement a range of different trading strategies. So let’s take a closer look at some of the more popular ones used by professional traders today.
Grid Trading Bots
As the name suggests, these kinds of bots are optimized for grid trading strategies, which involve placing multiple buy and sell orders at regular intervals, both above and below a set price. In doing this, the trader creates a kind of “grid” of buy and sell orders, which can be a very effective strategy during “sideways markets”. Sideways markets refer to those regular periods when a digital asset trades within a very narrow price range, without any wild fluctuations in its price.
During sideways markets, grid trading bots can help traders to make small but frequent profits as the price oscillates within a specific price range. By placing orders just above and just below a strategic price, the trader will generate profits the longer the sideways market perpetuates, benefiting from the small but still significant price fluctuations within that narrow range.
Users can create trading grids that are either “long”, “short” or “neutral”. Long grids only open and close long positions, making them ideal for upward oscillating markets, while short grids only open and close short positions, which is more suitable for downward oscillating markets. Neutral grids mean placing orders on both sides of the market, near to the current market price.
Grid trading bots are offered by many crypto exchanges. For instance, the ApeX Pro exchange debuted its grid trading bot in March 2024, giving traders the opportunity to take advantage of sideways markets by refining a perpetual trading strategy to capitalize on their frequent ups and downs within a certain price band.
Grid trading bots can be profitable during periods when an asset shows no definite upward trends or downturns for an extended period of time, with traders having the most success when the price variations are frequent and large.
Dollar-Cost Averaging Bots
Often known as DCA bots, these can be a very effective tool for generating passive revenue. The basic principle behind dollar-cost averaging is to make regular purchases of a specific digital asset, so as to split the trader’s allocation across multiple price levels. The strategy begins with an initial order that’s programmed to execute a specified number of times. Should the asset price fall by a designated percentage, a second trade will be executed that’s a multiple of the original order. This cycle repeats until the price reaches the trader’s predetermined maximum order count, the “take profit” level or the “stop loss” level. If the take profit target is achieved, the bot will then run a second trading cycle.
DCA bots are among the most common types of crypto trading bots, with examples including Binance Bot, Bittrex Bot, Deribit Bot and Bitsgap.
DCA bots are a good option for traders with a lower risk tolerance. While crypto prices tend to fluctuate very wildly, most crypto investors are bullish on the market’s longer-term prospects. As such, DCA bots provide a way for traders to systematically buy in to a certain digital asset in a way that minimizes market timing risks and ensures a better entry position.
Arbitrage Bots
Arbitrage refers to a trading strategy that aims to exploit market inefficiencies by taking advantage of the price differences between different exchanges. By using Arbitrage bots, traders can compare asset prices across multiple exchange platforms at once, and try to find discrepancies that could be profitable. For instance, one exchange might sell asset A at $1.21, while a second exchange lists the price at $1.215. An arbitrage trading bot can exploit this difference, buying the asset in question at the lower price on the first exchange and selling it for the higher price on the second.
Traders generally use bots for arbitrage trading because they are far more efficient than humans at spotting such opportunities. Moreover, they have the ability to execute trades based on the arbitrage opportunities they discover in milliseconds, ensuring profits can be taken before the exchange updates its prices.
Numerous crypto arbitrage bots are available to traders, with some of the most popular ones being 3Commas, Coinrule and Pionex.
Arbitrage trading is generally a profitable strategy, but the actual profits tend to be very small. As such, traders must trade very large volumes of digital assets in order to generate worthwhile profits. Very often, the level of profits a trader can make is determined by the speed and efficiency of the arbitrage bot they use.
Market Maker Bots
Market maker bots are somewhat different, employing an automated trading approach that increases market liquidity by filling an exchange’s order book with numerous buy and sell orders. This allows the trader to execute orders from other users when they’re needed. To perform these kinds of market making strategies, the trader requires vast amounts of capital, hence most market maker bot users are banks and financial institutions.
Market maker bots such as Cryptohopper aim to capitalize on the concept of the bid-ask spread, which refers to the difference between the price at which the market maker is willing to pay to buy an asset, and the price at which they’re willing to sell. The bid-ask spread effectively determines how profitable the market maker will be, assuming that the price remains relatively constant and the balance between buy and sell orders remains more or less equal.
AI-Powered Trading Bots
AI bots leverage artificial intelligence techniques such as machine learning to analyze market data and make strategic trading decisions based on the available signals they perceive. These algorithmic bots are intelligent enough to adapt to changing market trends, with the ability to refine the strategies using historical trading data. They’re among the most advanced trading bots around, but they require extensive amounts of data, and powerful computing resources to work efficiently.
One advantage of AI trading bots is that they can identify and capitalize on new market trends before others realize them. They do this by analyzing historical price data, executing trades in the direction of the trend when they identify it, aiming to profit from the expected price movement.
Although AI trading bots represent something of a gamble, they have been employed successfully by many crypto traders due to the well-defined trends apparent in digital asset trading.
Some of the best known AI trading bots in crypto include AlgosOne and CryptoHero.
To Bot Or Not?
Crypto trading bots have transformed the trading landscape, enabling experienced traders to automate their trading strategies in such a way that they’re never out of the loop. They also have the advantage of removing human emotions from the equation, which can be a powerful distracting force for traders.
It’s key for traders to understand the different kinds of trading bots that are available, and they should choose the ones that best align with their strategies and level of risk tolerance. Many traders have successfully utilized trading bots to their advantage – but they should remember that they do not offer any guarantee of profits, as crypto markets are notorious for making wild, unexpected swings at a moment’s notice.
