A trading bot can be a wonderful tool that enhances your profit-making scheme. But at the same time, it can also lead to heavy losses, why? Simple, trading bots can operate 24/7 and they have the ability to perform an unlimited amount of orders almost instantly.
The settings you use are extremely important and if you don’t set up some sort of stop, the script will continue to trade even if it’s losing money. Any kind of stop-loss is crucial as the crypto market is really volatile, 10-15% moves within hours are common and if your bot has no stop loss set, you can quickly end up losing most of your money.
That’s why proper risk management should be applied every time you decide to invest your money into something.
First of all, it is important to trade with an amount of money that you are willing to lose. This is one of the biggest rules in trading whether you are using a bot or not. It is recommended to create a separate exchange account for each automated service you launch. This way you are minimizing risk.
It’s also really important to pick an exchange with a lot of liquidity as well as a coin with high volume. Your stop loss can be skipped if there isn’t enough liquidity, this can lead to really heavy losses since you might think you are covered because you set a stop loss.
Many services offer a nice list of cryptocurrencies and exchanges that can be ordered by trading volume. This doesn’t mean you can’t pick low liquidity coins but you should set tight stop losses and check on your bot really often if you are investing in low liquidity markets.
As previously mentioned, a separate exchange account for each service is recommended. You should also play small, there is no need to start with big orders and most exchanges have a really low minimum order requirement. It’s better to be able to set 20-30 orders, this way, even if you have a few losing trades, you still have enough money left to keep going.
Diversify your funds
Diversifying is another rule of trading. The crypto market offers literally thousands of different coins and most crypto automated bot services offer the option to run several pairs at the same time.
For instance, if you are in a losing position you can launch an algorithm in the opposite direction and buy/sell accordingly to reduce your losing position. It’s also recommended to divide your balance into as many bots as possible.
Bots can be risky and lead to heavy losses
Setting stop losses is great but trading bots can malfunction. For instance, the software could stop working correctly due to some error in the code and the bot might stop placing the orders or do it in the wrong way. This is why monitoring the action as much as possible is recommended if you don’t want to lose all your money. Another risk is a system crash, which would kill all your bots and you could miss really important trades.
It’s really important to only use well known automated services, review websites and platforms like bitcointalk or reddit can be great sources of information and if a service sucks, you will often see complaints on those websites. Also, beware of any trading bot service that claims it can make you rich quickly.
Trading bots are not a get-rich-quick scheme
A lot of people think trading bots will do everything for you and be profitable no matter what. This is not what an automated algorithm is and it was never intended to be. You need to understand that it is simply a tool to help traders and that it is only effective if the strategy created works.
Furthermore, there is no strategy that will work forever, you will always have to adapt to the market. Backtesting is crucial here and pretty much the only good way to test your strategies, you should only use tested strategies and monitor their performance every day.
Keep in mind that some strategies can be especially risky when using automated trading. Strategies that involve placing multiple orders can be devastating if you don’t have any setting to stop the bot entirely if the funds lost surpass a certain amount.
Know when to stop
The bots themselves have many great features and settings. For example, a built-in stop-loss that can be triggered if the total amount of money lost is greater than a percentage, this is not for a single trade but all your money.
If you are losing money with your strategy, you can keep waiting, of course, and the strategy could work eventually but it’s always better to re-evaluate and perhaps change or tweak the strategy for the next time.
Trading bots have a few huge advantages, instant orders, they can trade 24/7 and they have no emotions, a good strategy will take in the count all these features to create a great performance. Scalping, for example, can be a great strategy, because super small and quick trades can be a good way to take advantage of the speed of the bot.