Most crypto trading bots use a few trading strategies by default. These are usually quite simple algorithms that take advantage of the huge volatility the cryptocurrency market offers. Humans cannot always use these strategies as they sometimes require placing instant orders or calculating numbers instantly, something that a trading bot can obviously do.
Today we are to discuss and explain a few different strategies applied to trading bots and find out which ones are the best for the crypto market.
The aim of the grid trading strategy is to place a good amount of small trades using ‘stop buy orders’ as well as ‘stop sell orders’ while setting your ‘take profit’ and ‘
However, the downside is an increase in human error due to the number of trades you have to simultaneously manage. That’s when trading bots come in handy since they can manage and indefinite amount of trades at the same time.
AI – Machine Learning
This trading method is fairly new and uses an Artificial Intelligence system to analyze past data and convert it into a viable strategy. The AI will basically learn on his own with the data you feed it with and will eventually become better and better at predicting the price of a crypto asset.
This is easier said than done, though, AI learning is extremely complex and the data required to make it work is huge. Additionally, the AI program cannot take in count things like market sentiment, relevant news and other important factors.
This strategy uses technical indicators such as RSI, MACD, EMA’s, etc to check when a good entry point appears. The RSI might be the most widely used indicator out there, it essentially measures the momentum of the market. When the RSI shows a value above 70 it usually means the crypto is overbought and indicates a pullback is approaching, accordingly, when the RSI shows values below 30, it means it is oversold and a bounce is very likely to occur.
The EMA’s (Exponential Moving Averages) are a bit different and you will have to usually use at least 2 in order to create the ‘moving average convergence divergence’. You can additionally combine a few technical indicators and only enter when specific conditions are created, this can be a difficult strategy to implement because some indicators can contradict each other.
These are also part of technical indicators but are often used by themselves. Bollinger Bands measure volatility.
Bands are wide when the market is volatile and contracted when the market is trading sideways. This strategy is especially useful in crypto because when the market is trading sideways it usually indicates a big move is ahead, this is not something that necessarily happens in normal stocks since an asset can be trading sideways even for years.
This strategy is essentially what we call ‘buy low, sell high’. You need to set a buy order immediately followed by a sell order at some percentage higher. When the sell order is filled, you need to set a buy order at some percentage lower and continue this process for as long as you want.
Trading bots are great for this since they can calculate whatever percentage you want to use and set all orders instantly. Another benefit is that you can leave it running for as long as you want.
This is a fairly simple strategy to understand, first you need to identify resistance and support levels, once you have them identified, you can place your buy or sell orders accordingly, it is advised to place your buy order a bit above the resistance level and the sell order a bit below the support level since fake breakouts can occur. There is also a high probability of not getting your order filled although this is not really a problem if you are using a trading bot.
This strategy takes advantage of the momentum of a coin and uses a clear level that a lot more people also use to get a really nice entry and high chances of big continuation. Keep in mind that this is not always the case and ‘fakeouts’ are definitely real and only stop losses will save you.
So, which strategy is the best for a cryptocurrency trading bot?
Trading bots are widely available and there plenty to choose from, however, you will still need to apply a strategy in order to make them work. The best strategy for a trading bot is the one who takes full advantage of what an automated algorithm is capable of doing.
For instance, placing orders instantly, not getting tired, not being subject to any emotions or errors, no difficulty in managing multiple trades at the same time and more. The most important rule is to backtest your strategies, ALWAYS. Backtesting allows you to check whether it works against historical market data.
The bottom line is: there is no best strategy. You have to choose one that works for you and for the market. The crypto market is extremely volatile and changes really quickly so your strategy will always need to adapt to the environment. A bot will not be able to do that by itself and you will always need to make small tweaks to your algorithms from time to time. The best strategy is the one that evolves and follows the market.