Crypto trading has undergone many changes with the introduction of crypto trading bots. These bots are nothing but automated software programs designed for buying and selling cryptocurrencies at the opportune time. The main idea behind using crypto trading bots is to amass higher profits for users since they can work even when the user is away and can take advantage of all lucrative trade opportunities 24×7.
Crypto trading bots monitor the market continually and react depending on set of pre-defined rules. You can customize the trading bots according to your individual preferences taking into account several factors like market actions, price, time, and volume. Besides, there are some effective bot trading strategies that one can incorporate into the bot they are using:
- Mean Reversion: This strategy is founded on the principle that when the price of any asset shifts from the average, it will go back to the original eventually. This is a principle that works for the stock market as well and it turns out to be a right call due to overall market sentiment. For instance, when a cryptocurrency A has an average price of $1 that suddenly shoots up to $1.5, traders will try to sell off the rest in bulk at the higher price to take advantage of the price difference. This again reduces the price from $1.5 to the original amount. Likewise, if the price drops to $0.5 from $1, the market views this as the bottom and begins to accumulate more coins so that the price goes up to $1 again.
- Arbitrage trading strategy: Since the prices of assets will not be the same in every cryptocurrency exchange, you can actually make profits from the price difference. So, you can buy crypto coins at a lower rate on one exchange and sell it at the higher rate on another exchange. But this act of buying and selling should ideally happen at almost the same time.
- Momentum trading strategy: In this type, the crypto investor will assess the rise or fall of markets depending on its momentum. In an ideal situation, the investor will ride a positive trend and then start to sell off his assets when the trend reverses. The main idea behind he momentum trading strategy is that asset prices will go up above the average; and then lose its steam and start to plummet. So, to take full advantage of this momentum, one must know the right times for buying and selling assets.
- Natural Language Processing (NLP): There is no denying the fact that prices of assets can swing dramatically in keeping with news trends, tweets and articles. Using this strategy, you can actually instruct the bot ways to interpret phrases and words from such articles. This will help the trade bot determine the underlying market sentiment.
- Naïve Bayes: This trade algorithm makes use of machine learning principles. The idea is to find out probability of occurrence of any event. So, you basically provide information to the bot and this will then help you determine the correct trade entry and exit timings.