Single Post

Why Do We Need Automated Trading Systems?

Over the years, we have experienced evolution, which emphasizes automation as a means of increasing productivity. Just as automation is sweeping across various industries, it has become important in investment markets. Apparently, the emphatic impact of automated trading systems on profitability and portfolio diversity has made them even more popular in the crypto market.

In today’s market, we have several types of automated trading systems and each promise to positively influence the productivity of traders. However, this doesn’t quite put to bed the growing skepticism that relying on machines to place trades is a bad idea, especially if we take a look at some incidents where this has backfired. Nonetheless, as with it all forms of systems, there is always a downside and the downsides of automated trading systems do not necessarily make it a bad introduction to trading.

In fact, the upside of using these systems outweighs the downsides. In light of this, we will take a look at some of the uses of automated trading systems in crypto trading.

What Are The Uses Of Automated Trading Systems In Crypto Trading?

Arbitrage

Arbitrage in the crypto market is one way of making profit since the prices of cryptocurrencies on exchanges are sometimes not in sync. As such, we can define arbitrage as the buying and selling of an asset on two different exchanges with differentials in prices. Traders normally take advantage of this slight difference in prices in order to make easy money. For example, you can buy bitcoin on an exchange that has BTC/USD trading slightly cheaper than another crypto exchange and sell on the latter for a profit. However, there is no guarantee that the discrepancy in prices will last, therefore, it is important that arbitrageurs are always on alert.

As a result, traders are known to utilize arbitrage bots in order to increase their chances of making profits. By so doing, they have introduced an automated system that will identify price discrepancies on crypto exchanges while instantaneously placing trades that will generate profit. Since an automated system is governing these processes, this is done in seconds. Nonetheless, the complexity of arbitrage bots or algorithms is on the high since the whole operation borders on execution speed which is seemingly more profound in this case than it is in other kinds of trades.

Scalping

Scalping is another type of trading strategy that is increasingly depending on automation. It involves a short term trading of assets in order to capitalize on small price changes. In other words, scalpers are more interested in the accumulation of profits from minor changes in price. Although this is not exclusive to the crypto market, the volatile nature of the market makes scalping more profitable since prices are always fluctuating even in a quiet market.

Due to the consistent movement in prices and the minor profit it yields, scalpers average as much as 100 trades per day. An accumulation of profits from each trade sometimes generates more profits for them than traders that are more interested in significant profit trades. The dependency on short burst in prices makes scalping a daunting task which depends on execution speed and precision while utilizing analytic tools that focuses on a smaller time frame.

As expected, scalpers rely on automated systems that can guarantee speed and impressive processing power for this sort of trade. Since traders in this category are interacting with the market in short periods of time, they are exposed to fewer risks. Also, it is more probable for an asset to make minor price changes than significant changes and automating these trades gives traders a chance to capitalize on more trades per day.

Transaction Cost Reduction

For institutional traders or retail traders that deal with large orders of trades, there is no better way of partaking in the market than employing automatic systems that will break these orders. The crypto market is still a closely knitted market that is susceptible to significant price changes when whales are active in the market. In order to reduce the impact of their activities on the market, these entities use algorithms to divide their orders into smaller ones that the market will absorb without significantly affecting the market trend albeit maximizing profit.

The importance of automated systems in this process highlights our dependency on algorithms for maintaining stability in the crypto market. Operations like this are too complex for the human brain.

The Bottom Line

There are risks that come with relying on the bots and algorithms for the execution of pre-analyzed trades, however, judging from the benefits of introducing these systems into trading activities- as listed above- it is safe to say that auto trading will remain an integral part of the crypto market. Apparently, employing effective analytic rules, risk management features, and quality algorithms/bots will go a long way in protecting traders from auto trading-induced losses.

Scroll to top