Automated Trading: What Are the Pros And Cons?

Auto Trading: The First Steps

To earn worthwhile profits from the financial market, you might need a solid understanding of how it works. Also, you need to be familiar with basic market orders such as entry point, exit, buy and sell orders. 

Luckily, automated trading bots can fix that hiccup by trading on your behalf. But why would you trust your money to some random bot and what these automated systems are? 

What Is an Automated Trading System?

An automated trading system is a set of rules that facilitates trading. Instead of learning how to trade, you can use ready-to-go solutions like Copy Trading or strategy presets. 

The first implies you’re following another trader’s strategy. Usually these traders partner up with platforms to yield steady results to the whole community, getting paid in return. Any user has access to its full trading history, net worth, losses, success/failure trading rate, and more.

Presets are built-in instructions that bots use to trade on your behalf. Large teams join powers to create reliable and reward-yielding algorithms, so newbie traders can use those later on. 

How Does Automated Trading Work?

An automated trading system leverages algorithms based on technical indicators that forecast price movements by analyzing several charts, prices and trading volumes. You may integrate many trading strategies into these systems. 

For example, you can input precise market entry and exit orders, as well as risk management settings into your automated trading systems. Other strategies include arbitrage, backtesting, paper trading grids, etc. Some advanced bots need a strong coding background.

Setting up your bot might require some level of expertise, as you will need to write a few lines of code that will buy and sell assets on your behalf. Typically, these sets of if/then rules are based on the timing and price volume.

Automated trading bots connect to crypto exchanges and execute orders based on premade settings. To get started, you must pick up a platform, copy a strategy from an expert, build a strategy from scratch, or use presets. Connecting automated bots to an exchange often involves API keys (Application Program Interface).

Once your bot is connected, it reads your details and does the trading for you. However, you still have control over your account, and you can disconnect the bot from your exchange anytime.

Automated Trading Systems

The core stages of automated trading bots operation can be split into three parts — initiating indicators, distributing risk, and execution.

Initiating Indicators

This stage involves gathering information about a particular market. The bot analyzes the market and gives you the best trading decisions void of emotions, just as in manual trading. Besides running the basic order types, these indicators are also used to decide when a market is good to buy.

Risk Distribution

This stage involves discovering trading risks and examining how and to what extent they should be allocated. These bots calculate risks and the number of assets to be traded at a given time.

Execution

This last stage involves placing orders and ensuring that all the buy and sell orders are fulfilled. During this process, the software will send a request via an API key, which connects to your chosen exchange, and then the trade is executed within a few seconds.

Why Automated Trading Systems?

Most financial market participants, including crypto, stocks, and forex traders use automated systems, as they provide many benefits. 

You can save time, while a system is trading on your behalf. In other words, you can set it up just once and do your own business, rarely checking and adjusting the bot if you feel like it. However, that’s not the case in most situations, as algorithms are battle-tested and can operate independently. 

Another important factor is the lack of emotions while trading across the markets is all about emotions. Both the biggest gains and losses are related to big emotions. If a trader closes several deals negative, the chances are this trader will end up burning his whole deposit. The reason is age-old fear. Another powerful emotion is greed, which works in the opposite direction but yields pretty much the same result.

Imagine a robot trading on your behalf and working around the clock. If you never heard of a deal, how can you care about it or express even a tiny emotion? No more monitor staring and no more deposit losses due to emotional trading. However, as pleasing as this might sound, automated trading also comes with a few drawbacks. 

Pros of Automated Trading Systems

Automated trading bots offer a lot of benefits for crypto investors. Any part-time trader or investor exploring the crypto space may use automated trading systems to get an additional income stream. Let’s break down the core benefits traders can get using automatization in their day-to-day market activities. 

Efficiency

Trading the market manually can be quite time-consuming, and some part-time traders cannot dedicate enough time to make trading as efficient as they wanted to. 

Automated trading bots can solve this issue, as you can get more productive by doing other things while your bot does profit-oriented trading for you. These bots open and close orders even while you sleep or out swimming or partying. Hence, automated trading systems maximize the chances of making a profit from the markets.

Automated bots also boost trading efficiency via processing speed, allowing both basic and advanced orders to be executed quickly. Stop Loss and Take Profit orders are also executed promptly.

Minimizing Emotions

Emotional trading addresses poor decision-making due to fear or greed — traders might get greedy when the market is favorable, and afraid when the market is going against them. 

Your emotions can shake your trading attitude, literally forcing you toward potentially loss-making deals. Traders tend to buy assets when the price is bullish and sell them when it's bearish. The inability to control these emotions is considered a weak point, especially over the long run. 

Automated trading systems use historical and statistical analysis to make important trading decisions. Thus, eliminating any form of emotions from the trading equation. 

Moreover, robots monitor the market and help beginners enter positions at best possible time. Automated software is executed automatically, as it’s a set of algorithms. Instead of sticking to a random plan driven by emotions, you can benefit from a disciplined trading approach, which may significantly affect your profit consistency.

Backtesting

Another excellent benefit of automated systems is backtesting. This concept involves testing a particular trading strategy using previous statistical market data. As a result, it helps you know the effectiveness and validity of a system. Backtesting also allows you to alter the setting and customize the robot before real trading.

This exciting feature of automated software also allows you to examine the expectancy rate and approximate potential profits per deal. Simply put, backtesting gives beginners a shot at the market — they get to use a predetermined model that closes and opens trades on their behalf.

Diversifying Trading

Diversification tops the list of risk management tools in the crypto market. While some traders find it challenging to do this manually, automated software simplifies the process. Automated trading systems enable users to trade many accounts simultaneously or apply several trading models at a time. Thus, it reduces risk by allocating the asset across different market types.

Cons Of Automated Trading Systems

The web is full of automated trading benefits, but software providers rarely break down the drawbacks trading software might entail. Some disadvantages are mentioned below.

Technical Failures

Automated trading software conducts trades via APIs, allowing them to work algorithmically, with no manual input. They tend to malfunction if they experience any mechanical issue such as network connectivity or hindered power supply.

Also, there could be security breaches as some software providers may stay off the more secure server. Luckily, not many providers experience technical issues. 

Monitoring

Even top bots can’t think as humans do. That implies you need to watch the bot's performance to ensure an ineffective or affected strategy is not being repeated. Why constantly check if bots are so smart, though?

The crypto market can be affected by many things, including news, manipulation from the big players, etc. A bigger part of these events can hardly be predicted. Hence, bots can’t really take these events into account or predict those in close proximity. 

So you don't want to leave your bot out dry. This can be exhausting for part-time traders or beginners who opted for automated trading because of time efficiency. Automated trading systems can experience failures that could cause missing orders. Examining your bot consistently allows you to notice these failures and address them instantly.

An automated bot will make the perfect move, but it won't take action if it’s barely controlled or monitored, especially over the long haul.

Over-Optimization

Over-optimization is the process of consistently adjusting the functionalities of trade strategies to improve the value of every money invested. For example, altering a strategy to attain unusual results on the past statistical data on which it was tested. 

This sometimes turns out to be incorrect as you can't always expect a simulated strategy to perform in an exact way on live trading. As a result, these “guaranteed” profitable trades may fail from time to time. However, this is not a critical issue, as most bots operate on a scale. In other words, one failure doesn’t cover 99 successful trades. The fail/success ratio varies significantly, but reliable bots overlap losses with profits as a rule of thumb.

Avoiding Scam Bots

Automated crypto trading can be an excellent way to make a profit. However, you must understand that scam bots are now rampant in the crypto space. All targeted explicitly at individual traders. 

You must protect yourself from bot scams and other types of automated-driven scams. An easy way to stay protected from scammers is by picking a reliable trading software provider like 3Commas.

Let’s break down key ideas of how you can take all the benefits of automated trading while avoiding major risks.

How Do You Protect Yourself?

First off, you should do your due diligence and research the market. Sort out a bot and scrutinize any drawbacks attached to the bot you're planning to use. While reading news about a specific bot, you should do a fact check on the review article and check for sources. Some scammers pay freelance writers to write-up exceptional reviews for their products to get people to sign up. That’s a red flag no reliable providers would raise. 

Another precaution you can take against scam projects is joining communities of traders who already have experience in the crypto space and asking if you can trust a particular bot you're planning to use. A perfect example is 3Commas social media pages like Twitter.

In addition, you can reach out to the customer service group of your preferred exchange, make use of the information and note down the bots they recommend. Likewise, many verified learning resources are available on Google and YouTube to learn about automated trading software and bots. Always stay guided!

Cloud Platforms

Automated trading systems take different approaches to make the best out of the market. Notably, server-based automation does offer some genuinely distinctive features and benefits. 

Users never have to handle the installation locally when upgrading their bot. Instead, they do this via their online account. They are given unique and secure login details backed by 2FA authentication. 

Also, server-based automation requires no extra server/hosting equipment to be purchased by the practice. Everything is monitored externally by the provider. A reputable web-hosted bot provides a secure server to manage all users' information.

Establishing Auto Trading Rules

While some trading platforms offer pre-built trading strategies to users, some platforms do not. As a result, It's pretty impractical to be involved in automated trading and not be able to set it up. Almost every platform has at least a couple of tools to build on. So, how do you go about this?

There are many ways to design an automated crypto trading bot. The simplest method is to look for an open-source bot, download and edit a few things and use them immediately. This demands little to no technical skill. They are usually cheap and time-efficient.

Building your own bot, and trying to set up trading rules, will require you to have at least basic coding & trading skills. Building your own bot is a rocky road, which is why you might want to pay attention to reliable providers like 3Commas. Let’s break down the core benefits it entails.

Benefits of Automated Trading Systems by 3Commas 

3Commas is an automated trading terminal designed to bootstrap & simplify trading across the globe. The core feature you can get from the 3Commas terminal is its advanced trading bots and analytical tools. The platform’s core benefits are mentioned below.

Safety and Efficiency 

3Commas is a cloud-based trading software provider, meaning all your trades are blazingly fast, effective, and safe. The platform integrates 23 major exchanges via API keys, allowing easy connection between platforms. In addition, you have complete control over your bot, and all your passwords are encrypted.

Cloud services allow you to access the trading terminal & portfolio management features whenever you like — be it your PC, laptop, or mobile device. 

All 3Commas bots operate from the cloud, making them as efficient as possible and minimizing possible downtime, freezing, and lag issues. Moreover, the developing team constantly fixes the bugs and works toward adding even more trading features. 

Free Trial 

You can monitor and manage your portfolio, launch your first bots, and access some of the best analytical tools the 3Commas terminal has.

You can get free access to the following features:

• One GRID Bot
• One Options Bot
• One DCA Bot (One multi/single pair for spot & one for margin trading)
• One Active SmartTrade
• Unlimited scalper terminal
  
  The free trial is built to help you increase your profits straight away, also providing room for upgrades if you feel like it.

Flexible 

The 3Commas trading terminal provides users with quite affordable yet valuable pricing options. Moreover, you don’t have to get a subscription to enjoy features. Each user can start off with a trial plan and test out core features for free.

If you’re looking for advanced features, the 3Commas platform provides three plans to choose from, depending on your specific needs. You’re quite flexible in terms of pricing, as there are multiple duration options, including 1,3,6 and 12-month long plans. 

A year plan comes with a solid discount of up to 25%. To save even more, you can refer friends and get an additional 25% off the price, resulting in a 50% discount for year-round support & powerful features. 

The plans range from $14.5 to $49.5 per month with annual payment, and $29 to $99 with monthly payment, depending on the features you want. In other words, you can save a lot if you subscribe upfront.

However, you can stay free as long as you want, still enjoying some of the functions 3Commas provides. You can find more information on plans here. 

Before You Use Automated Trading Systems 

Even though crypto trading bots can be profitable, you should not expect a 100% guarantee from them. They are not a money printing system. Instead, they can help you analyze the market better and automate the hard part of investing, like customizing trade parameters.

So when planning to automate your trading model, you must ensure that the bot meets your specifications. For instance, if you need a secure bot that is more concerned about long-term investments, do a background check on the supported exchange 

Also, you might want to consider the following factors:

• Short-term trading or long-term investment
• The exchange's minimum deposit and withdrawal 
• Dedicated trading time
• Your portfolio balance 

All these factors need to be ticked off before starting your automation journey. 

Closing Thoughts

Automated trading platforms have revolutionized the way traders approach the financial markets. They provide efficiency, objectivity, and the potential for round-the-clock trading. However, like any tool, they are as effective as the person or strategy behind them. While they offer several advantages, from reducing emotional trading to providing backtesting capabilities, they also come with challenges, such as the risk of technical failures and the need for ongoing monitoring. With the increasing sophistication of scam bots, it's crucial to remain vigilant, conduct due diligence, and actively participate in trusted trading communities.

If you're considering adopting automated trading, it's essential to align the bot with your trading goals, understand its limitations, and continuously educate yourself. And while platforms like 3Commas provide a reliable solution in the ever-evolving crypto space, never forget that no tool offers guaranteed returns. Always approach trading with caution, a well-thought-out strategy, and an understanding of the risks involved.

As of now, in 2023, this information provides a comprehensive look at automated trading systems. Still, always be sure to stay updated with the latest advancements and trends in the industry to ensure informed decision-making.