Strategies for Effectively Implementing Trading Bots

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An automated trading system are capable of achieving consistency and delivering outstanding results in the long run. A good investment bot builds a balanced portfolio and maintains its profitability if its user understands how to utilize various technical analysis strategies and runs automated trading systems strategically.

You may think that trading bots are simple and can be easily integrated into any portfolio, but the reality is that you must learn how to use various automated systems well. Otherwise, they will underperform or deliver results lesser than many low-yield options.

 

Are automated crypto trading bots better than other investments?

Since automation comes with its own set of unique risks and profit generation methods, we can think of it as a separate class of assets. There different types of assets that you may be interested in investing. For example, fixed-income assets such as bonds and loans are often chosen for consistency and predictability which are great qualities for financial instruments if the economy is doing well on average.

Compared to stocks, real estate, and cryptocurrencies themselves, automation is very different. A bot is not something tangible that you can resell to recoup some of your investments if you don’t like its performance. It is also not an asset on its own, but a tool that manages your other assets. However, since it operates independently within the boundaries you set, it should be considered a separate asset class in your portfolio.

Just like you would think of a bank deposit or a share in a trust fund a separate asset that has its own yield and risk style, automated trading systems must be analyzed as unique instruments.

As such, they are neither better nor worse than other asset classes. They are different and have unique purposes. Investors may use automation to expose themselves to the crypto market without actively learning its nuances or to use crypto arbitrage systems that work better in the chaotic crypto ecosystem compared to the modern commodities market.

 

Types of trading bots for crypto

The number of bots that can exist given the sheer quantity of potential parameters that you can adjust and the variety of technical analysis strategies that you may want to automate is close to infinite. However, there are some prominent automated trading systems frequently used by retail traders. Let’s talk about some of them:

- Social trading bots. Copying in-market activities of experienced retail traders is not a novel tool for people with at least some experience in financial markets. Forex pioneered the concept back in the beginning of the 2000s. Contemporary marketplaces became more sophisticated and crowded, but they still offer good old copy trading functionality. These are often considered crypto trading bots for beginners since you don’t need to learn the market prior to investing.

- Distributed Cost Average. This approach to placing a series of orders to break down a market position into several has been successfully used for many decades. It is an excellent way to reduce the average cost of investment. You may use it to increase the amount of assets in your portfolio at a discount or make high-frequency trading (HFT) slightly more efficient.

- Statistical arbitrage. This system can be done manually if you have a team of traders that can spend hours liquidating positions and placing new orders according to your exact instructions. Yet, it will still fail since the sheer amount of time required to manually adjust a portfolio will defeat the very purpose of using this trading method. Statistical arbitrage refers to a system where you place dozens or even hundreds of orders simultaneously to create a balanced portfolio by including correlated assets.

- GRID bots have been recently introduced to the crypto trading ecosystem. One of the pioneers who designed early versions and still spearhead this particular sector of the automation industry is WunderTrading. GRID uses the DCA approach and takes it to the next level by using delayed orders (these complex market positions often draw a “net” on the price chart giving the system its name).

- Aggressive custom bots. You may use various technical analysis strategies that produce a lot of false positives but also deliver a good amount of true positives when generating signals. These trading systems can be used in day trading and scalping to outpace the market by leveraging the power of high-frequency trading.

These staple ATS can be separated by their risk levels. Statistical arbitrage and DCA are usually low-yield and low-risk systems while GRID and custom bots can be associated with high risk. Copy trading bots perform just like retail traders you follow so the risk profile here can be adjusted as you see fit.

 

Diversifying your portfolio with automation

Risk level is the best trait to judge whether an asset belongs to your portfolio. For example, if you have risky long positions like a bunch of KASPA tokens, using a swing day trading bot, which is often a huge gamble, will significantly increase the risk level of your portfolio. On the other hand, when you rely on staking $ETH to carry the whole portfolio, investing a huge amount of assets into statistical arbitrage would be a waste.

The ideal scenario is when you have a balanced portfolio with risky assets hedged by low-yield and low-risk investments. Below are some examples of how you can introduce automation into your financial plan:

- Portfolios heavy on fixed-income assets like bonds will benefit from having multiple investments with higher yields and risk levels. Using DCA bots to acquire $BTC or $ETH on the spot market to complement your other assets will be a good idea.

- People who buy real estate properties or focus on other expensive classes of assets often cannot afford to also invest in something else. Using capital-intensive automated trading systems such as statistical or triangular arbitrage will be suboptimal. Instead, focus on using HFT strategies with your margin account to make money without putting in too much money.

- If your portfolio leans toward riskier investments like presale DeFi tokens, shares of startups, and high-yield investment projects, you should always have a big chunk of your capital locked in something safer like staking, fixed-income assets, or systems such as statistical arbitrage, GRID bots, etc.

The idea is to use automation as a balancing tool to ensure that your portfolio has assets with different risk levels. The perfect ratio of profitability to risk is what guarantees success in the long run. It is also worth mentioning that such portfolios are more flexible as they allow investors to quickly switch from one type of assets to another without any hassles.

 

Risks of overly relying on automated trading systems

Many newcomers often fall victim to the romanticized version of the automation industry. The bright future with AI bot investments and fully autonomous portfolios that just print money for their owners. However, automation is not a panacea. It has its own weaknesses and risks:

- Technological risks. Bots may fail to deliver good results due to various issues with their coding, server uptime, connectivity, CEX API responsiveness, and more. We still do not have perfectly operating software in any industry!

- Human factor. It is easy to relax when bots do everything for you. However, their performance still depends on which technical analysis system you choose and how well you can manage risks by strategically placing delayed orders.

- Uncertainty and volatility. Most technical analysis strategies work well under certain market conditions. Your bots do not see the big picture. They will continue following their instructions to the letter even if the situation in the industry is unfavorable for HFT.

There are some other risks unique to automated trading bots for crypto, but you don’t need to know all of them to understand the main point: you should never rely on automation alone to make you rich. In fact, you should never rely on any kind of investment to do that. Everything has a risk profile and you may be unfortunate enough to experience the bad side of a bad investment.

Learn to use automation for its utility as a unique asset class that has a potential to increase or reduce the overall risk profile of your portfolio regardless of what else you include in it. A retail trader who knows how to implement a crypto investment bot in their financial strategy will greatly benefit in the long run!

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