KEYTAKEAWAYS
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Historical Development and Adoption: Automated crypto trading has evolved from basic systematic approaches in the 1940s to complex systems used today, deeply integrating with financial markets since the 1980s and showing significant growth in acceptance and sophistication.
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Strategies and Execution: Key automated trading strategies include the Chip Analysis, Reversal and Contrarian, Trend, and Take-Profit and Stop-Loss Strategies, each utilizing different parameters for executing trades based on pre-set conditions aimed at maximizing returns or minimizing losses.
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Advantages and Risks: While automated crypto trading offers major advantages like operational efficiency and emotional detachment, it also presents risks such as potential program errors and the inability to adapt to unforeseen market changes, necessitating cautious implementation and continuous monitoring.
CONTENT
In this article, CoinRank interprets the essence of automated crypto trading, its historical development, strategies like trend and chip analysis, and its pros and cons for investors.
WHAT IS AUTOMATED CRYPTO TRADING?
Automated trading refers to the use of computer programs to facilitate the trading of various financial instruments. The concept of automated trading can be traced back to 1949, introduced by Richard Donchian. Unlike the sophisticated automated trading systems familiar to investors today, Donchian’s initial approach merely involved applying systematic logic to buying and selling funds excluding programs’ support.
By the 1980s, automated trading became more widely accepted among investors, and by the 1990s, it had firmly established itself in the financial markets.
You might wonder if the same principles apply to cryptos, given the long history of automated trading. The answer is a resounding yes. In this article, CoinRank will analyze the advantages of automated crypto trading and introduce four common methods for automated crypto trading.
WHAT SHOULD WE CONSIDER DURING AUTOMATED CRYPTO TRADING
- Market Trends: Understanding market conditions through data (i.e.whether it’s a bull or bear market).
- Trade Triggers: Assessing specific conditions that must be met for a trade to occur, such as reaching a certain price or a specific time point.
- Trading Volume: The expected quantity of crypto to be traded.
- Take-Profit and Stop-Loss Standards: Setting profit-taking and loss-cutting conditions to minimize investment risks.
- Historical Trading Records: Regularly reviewing past trading records to identify areas for improvement and make necessary adjustments is a crucial part of automated crypto trading.
4 AUTOMATED CRYPTO TRADING STRATEGIES
Just like traditional manual trading, investors need to provide initial criteria for automated crypto trading programs to determine when to execute trades. Whether for traditional financial products or cryptos, the following four strategies can guide the parameters for automated crypto trading programs:
- Chip Analysis Strategy
The chip analysis strategy involves observing the capital flow direction of major players in the investment product (e.g., for cryptos, observing entities like GrayScale or BlackRock) to determine subsequent investment strategies. The rationale is that these major players have substantial funds and influence over the market, making their moves a reliable basis for efficient investment decisions.
- Reversal and Contrarian Strategy
The reversal and contrarian strategy involves buying an asset when its price has dropped to a relatively low point, anticipating a rise, or selling it when its price has risen to a relatively high point, anticipating a decline. The criteria for determining these relative high and low points need to be pre-set in the program.
- Trend Strategy
The trend strategy is based on market indicators (such as the moving average of a certain period) to predict whether the market trend will rise or fall, guiding subsequent buy and sell operations. Common indicators used in trend strategies include the MA and EMA.
- Take-Profit and Stop-Loss Strategy
Since no investment guarantees an absolute profit, some investors use strategies that predefine acceptable loss limits. If the loss reaches a predetermined level, the program will automatically close the trade to prevent further losses. Conversely, some investors worry about market reversals that could reduce profits, so they implement take-profit strategies where trades are automatically closed when profits reach a certain level.
The strategies introduced above represent only a portion of the automated crypto trading tactics. With continuous technological advancements, many crypto exchanges and automated crypto trading platforms have developed various strategies, including copy trading and grid trading.
Additionally, the trading bots we introduced earlier are one of these strategies.
ADVANTAGES OF AUTOMATED CRYPTO TRADING
Compared to traditional manual trading, automated trading offers advantages such as efficiency and real-time execution. Here are 2 benefits that illustrate why automated crypto trading may be more suitable for certain investors:
- Investors Unable to Monitor the Market Full-Time
Due to the 24/7 trading nature of crypto, investors need to spend more time monitoring the market compared to other financial instruments. Automated crypto trading is crucial in this context. Once the initial parameters or acceptable profit and loss limits are set, investors can comfortably allocate their time to other activities without constantly monitoring the screen.
- Investors Prone to Emotional Decisions
As mentioned earlier, automated crypto trading relies entirely on market data and pre-set parameters, free from the influence of human emotions. This significantly reduces the risk of investment errors caused by irrational decisions. If investors find it challenging to invest or analyze the market purely based on data, leveraging automated crypto trading can help improve investment returns.
POTENTIAL RISKS OF AUTOMATED CRYPTO TRADING
While automated crypto trading indeed enhances efficiency and reduces the time investors need to spend, it is crucial to be aware of the following potential risks:
- Program Error Risks
Automated crypto trading depends on programs and the initially set parameters. If the program has bugs, it could result in unexpected losses for the investor.
- Inability to Respond to Unforeseen Changes
As automated crypto trading strictly follows set parameters, it does not know how to handle situations that were not pre-programmed. If an investor fails to anticipate an unexpected event (such as the bankruptcy of FTX), the automated trading system may not respond appropriately, leading to suboptimal trading decisions.
CONCLUSION
Due to crypto trading’s 24/7 availability, automated crypto trading offers investors an effective tool to enhance investment efficiency. However, investors must remember that automated crypto trading is not without its flaws. Before use, thorough research on various indicators and potential risks is essential to maximize the benefits of automated crypto trading.
FAQS
- What Is Automated Crypto Trading?
Automated trading refers to the use of computer programs to facilitate the trading of various financial instruments. Automated trading applies to cryptos as well.
- What Should We Consider During Automated Crypto Trading?
Regarding automated crypto trading, investors can take the following factors into account:
- Market Trends
- Trade Triggers
- Trading Volume
- Take-Profit and Stop-Loss Standards
- Historical Trading Records
- What Are the Four Types of Automated Crypto Trading?
Automated crypto trading includes but is not limited to the following strategies:
- Chip Analysis Strategy
- Reversal and Contrarian Strategy
- Trend Strategy
- Take-Profit and Stop-Loss Strategy
- What Are the Advantages of Automated Crypto Trading?
The advantages of automated crypto trading include: 1. Investors don’t have to monitor the market full-time 2. Suitable for investors prone to emotional decisions
- What Are the Potential Risks of Automated Crypto Trading?
The potential risks of automated crypto trading include: 1. Program error risks 2. Inability to respond to unforeseen changes
