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
- 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
- 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
- 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
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!