Looking to dip a toe into crypto trading bots, but unsure where to start? This article is here to help. We will explain what trading bots are, as well as the best practices and common mistakes when making them part of your trading strategy.
What’s a Crypto Trading Bot?
Let’s dive right in, starting with a definition of crypto bots. A trading bot is a computer-based algorithm that analyzes the market using technical indicators such as moving averages and trends’ strengths. Based on these indicators, it generates buy/sell signals on underlying assets. To put it in a nutshell: a crypto trading bot is an automated strategy that buys or sells crypto or derivatives on your behalf.
Why use a trading bot? Besides the fact that it saves you time (you don’t have to monitor your exchange continuously and place the orders yourself), trading with bots means that you stick to a predefined strategy. The bots have been designed with rigorous algorithmic rules, backtested on real historical data. A bot will not make rushed decisions based on emotions the way humans are prone to.
However, bots are not perfect investors either. The crypto market is very volatile, and this can lead to false signals. This happens when bots calculate that the market is moving in a given direction, only for the opposite to actually happen. In addition, past results are not a guarantee of future profits.
Your capital is always at risk when you are trading, whether independently or with bots. It’s important to keep that in mind when you are taking your first steps in the world of crypto.
How Should You Pick a Crypto Bot?
Bots are here to make trading as effortless as possible, that’s for sure. But you still have to decide which bot to choose. Here are some tips to help you select your first crypto bot.
Source: HAL, CoinShares
Tip 1. Do some market research first
You should monitor the crypto market before choosing your first bot. This will help you understand where the market currently stands, be aware of recent events and know which crypto are performing well (or poorly).
Different types of bots perform best in different market contexts. Is the market volatile, with prices making quick highs and lows? If so, you might want to pick one of our Pulse strategies, as they shift positions between long and short depending on the acceleration of trends. If the market is trending upwards, have a look at Wise strategies — they are designed to capture positive trends.
And research doesn’t stop when you have picked a strategy. Following market news is crucial if you want to understand how our strategies are performing.
To help you stay up-to-date with the market, we regularly publish crypto market updates on our blog. Why not subscribe to HAL newsletter too? Each Friday, you will get a market recap in your inbox.
Master tip: Always be on top of crypto market news (global trends, new coins and platforms…).
Tip 2. Understand the bot’s strategy
Each of HAL strategies comes with its own profile. Think of it as an ID card that features useful information about the bot, including its performance over time. Pay especially close attention to the « Strategy » section. This will explain the bot’s strategy, and how it reacts to market fluctuations.
There are several types of strategies on HAL. Wise strategies are long-term, trend-following strategies. They are designed to take part in market upsides and go neutral when they detect a drop in prices – this makes them theoretically safer, but they can suffer from false signals when the market is unstable. You can learn more about them by going through the article “What’s a Wise Strategy?”.
Pulse strategies are aggressive, long-short trend following strategies that can change positions every hour. They are meant to benefit from a volatile market, and they are very short-term oriented.
There are two more strategies currently available on HAL. AI Pick relies on artificial intelligence to automatically try to identify and select the top-3 performing strategies on HAL for the following 24 hours. Finally, Dynamic is composed of 13 strategies, including AI and altcoins strategies, to better control volatility.
All bots trade on an underlying asset. By comparing the asset’s performance to your bot’s performance, you can see if the chosen strategy is under or overperforming. This is a long-term analysis, and you will want to see the evolution for 6 months or a year. To do so, you can have a look at historical market data on websites such as CoinMarketCap. Remember past performance is not a guarantee of future results.
Coming soon: we are working on integrating this information to the strategy’s ID card.
Master tip: Understand how strategies work to see which one is better suited to your trading goals.
Tip 3. Assess your risk acceptance
Trading is risky. Once you know that, you need to decide on the level of risk you are actually comfortable with. On the strategy profile, you will encounter the “max drawdown” metric. It is a partial indicator of volatility: it charts the maximum loss from a peak to a low, before a new peak is attained. However, it does not state how long it took the asset to return to its peak (provided it did).
Going back to general categories, long-only bots such as Wise are deemed to be safer than long/short bots, as they go neutral during a downturn. Remember this is theoretical: false signals can also lead long-only bots to make erroneous decisions resulting in losses. And the bot’s volatility is also linked to its underlying asset’s volatility and the global market context.
Master tip: Set the maximum amount of risk you are willing to take and choose strategies accordingly.
Tip 4. Set your investment horizon
Short-term, medium-term, long-term: bots can operate in several time frames. You need to decide on your own investment horizon for your funds. Are you willing to keep funds invested for a few days, a few months, or a few years?
All bots do not take the same time to recover from a fall in prices, depending on their strategy and exposure. Theoretically, a weekly, long-term strategy such as Wise will take more time to recover than an hourly, short-term one like Pulse.
Master tip: Have a clear timeframe in mind when investing.
Tip 5. Check trading fees
Exchanges collect a fraction of each executed transaction. This is called a trading fee, and you need to keep this extra cost in mind when choosing a strategy. It can be complicated to predict the exact amount, but it rises with transaction frequency: trading fees will be higher for an hourly strategy, compared to a weekly one. Have a look at your exchange to check its fees policy.
HAL fees come on top of this. A reminder: HAL charges €19,90/month, with a 15-day free trial. And this is independent of invested sums: up to $100,000 can be traded on HAL, always for €19,90/month.
Master tip: Estimate your costs to have a complete overview of your budget.
3 Common Mistakes When Choosing Trading Bots
What should you not do when trading with crypto bots? We share three common mistakes below.
Mistake 1. Relying exclusively on past performance
We cannot stress this enough: past results are not a guarantee of future results. A bot with positive performance in the last six months can have a negative one six months ahead. This is why it’s important to have a global understanding of the market, beyond profit metrics.
Mistake 2. Starting with risky coins
It can be tempting to start with new coins that might appear to exhibit higher returns. But these so-called alt coins are also more volatile (and riskier) than the more established, blue-chip coin that is Bitcoin (BTC). While you are getting acquainted with crypto markets, it’s wiser to stick to bigger coins.
Mistake 3. Being too impatient
Sure, trading bots can open and close positions in seconds, or even micro-seconds. That’s not how your global strategy should be designed. When you are getting started with trading, it’s tempting to switch between bots without giving them the time to perform better once market conditions change.
For example, a long-only bot goes neutral when the market is in a downtrend. Its performance is low. But it should be well-equipped to take part in the market rebound when (and if) prices start rising again. So it might be worth waiting for a bit before moving your allocated funds to another bot.
Choosing your first bot can be daunting, but we hope it will be easier with these tips in mind. You can check our full strategies catalog once you logged in, or keep reading educational articles on our blog. We also have a dedicated Q&A page to get you started.
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.