How to Choose a Crypto Trading Bot? The Ultimate 10-Step Guide

There’s no use denying it – no matter how experienced of a trader you are, there will be times when the crypto market will get the best of you. The high volatility and 24/7 nature of crypto trading make it almost impossible to stay ahead of the curve at all times. This is why I’m going to teach you how to choose crypto trading bots and take some of the load off!

Trading bots are a trusted staple in traditional finance, so it was only a question of time before they started gaining traction in crypto trading, as well. They work by analyzing market data and automatically executing orders directly on the exchange through API connections – in a faster, more logical and more efficient way than any human could.

If you’ve used a major centralized exchange like Binance, Bybit, or Kraken before, you might have played around with trading bots at some point – but what are they exactly, and how do they work? More importantly, how to choose a crypto trading bot that’s right for you among the myriad of options? You’ll find all the answers in this ultimate guide!

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What are Crypto Trading Bots?

Before we get to the part where I show you how to choose a crypto trading bot, let’s get down to the basics first. What exactly are trading bots?

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To put it simply, a trading bot is a computer program that uses artificial intelligence and advanced algorithms to automate certain processes – in this case, the buying and selling of cryptocurrencies. They analyze massive amounts of market data (both historical and real-time) to detect the best time to place buy or sell orders on your behalf based on certain predefined rules.

Crypto trading bots can be just as complex and varied as trading itself. They can be customized to carry out a wide range of trading strategies, from basic market-making to arbitrage or futures trading.

That’s what makes them so versatile: newbies can utilize them to gain an easier start without in-depth market knowledge. Meanwhile, pros embrace them as a tool to help execute complex strategies or manage a large portfolio.

The implications are probably obvious by now: crypto trading bots have a major edge over manual trading (at least in theory) due to removing the human element and all the inefficiencies that come with it. Unlike us, the algorithm never sleeps, can’t succumb to emotional biases, and has a far superior reaction time. It’s like having a personal assistant whose sole purpose is to help you reach your trading goals!

Crypto trading bots interact with centralized exchanges through APIs (Application Programming Interfaces). Alternatively, they can also interact with the blockchain directly via smart contract calls, as is the case with trading bots on decentralized exchanges.

How Do They Work?

The general concept of a trading bot might look simple on the surface, but how do they actually function under the hood? Learning what makes them tick will help you better understand how to choose a crypto trading bot later. So, let’s get on with it!

Crypto trading bots employ sophisticated algorithms to analyze market data and make trading decisions. These algorithms are programmed to respond to various technical indicators, such as moving averages, Bollinger Bands, and the Moving Average Convergence Divergence (MACD). Through the combination of these indicators, bots can identify profitable trading opportunities and place trade orders accordingly.

Sounds complicated? Let me give you a real-life example. Let’s say you’re trying to analyze Bitcoin price trends to spot the best time to buy or sell. You decide to use the moving averages formula to calculate the average price over a specified number of days.

Trying to do this manually would require you to read the charts every single day, write down various price points and crunch the numbers yourself. You might as well quit your day job or never sleep again!

On the other hand, if you knew how to choose a crypto trading bot, it would let you achieve the same result with much less work. The software would monitor the charts for you and automatically place orders when the predefined signal is triggered.

While the specifics depend on the bot’s design and purpose, here’s a broad overview of how they work:

• Data analysis: The bot collects and analyzes both historical and real-time market data indicators to identify trends and patterns.
• Signal generation: The bot generates a signal showing that the conditions for a buy or sell order are met.
• Risk allocation: You can customize the risk preferences the bot would take into account, such as the maximum percentage of your portfolio you’re willing to allocate to a single trade or take-profit targets.
• Execution: Once the signal is generated and the risk preferences are set, the bot automatically places orders based on the predetermined rules.

Trading bots don’t just operate at a single-trade level. Instead, their real-time data monitoring allows them to rapidly respond to changing market dynamics and adjust your trading strategies to suit current conditions. If keeping up with the volatile crypto trading environment feels like an uphill battle, a trading bot might be the perfect tool to improve your odds.

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Types of Crypto Trading Bots

While exploring how to choose a crypto trading bot, you’ll soon discover they come in different types, each with its own functionalities and purpose.

Here are the most common types you’ll encounter:

Arbitrage Bot

This type of bot is designed to exploit price discrepancies between different exchanges^[1] and turn them to your advantage. It monitors multiple exchanges simultaneously and automatically places buy and sell orders to make a profit from the price difference.

For example, let’s say you discover that Bitcoin is selling for $94,950.69 on Binance and $95,065.00 on Bybit. These prices can rise or fall at any time. Instead of trying to track these fluctuations manually, you could set up an arbitrage bot to monitor them for you. In this case, it would immediately detect a sell order opportunity on Bybit and a buy order opportunity on Binance.

Market-Making Bot

This bot does exactly what it says on the tin. There’s no crypto trading without the market for it. Therefore, this crypto trading bot simultaneously places buy and sell orders at various price points, ensuring high liquidity.

The profit, in this case, comes from the bid-ask spread: that is, the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept (the ask). Users can set how tight or wide the bot's bid-ask spread is; a tighter spread captures more trades but earns smaller profits per trade.

Copy Trading Bot

Copy trading is a strategy where one trader follows another, more experienced trader and mirrors all of their trades so they can learn from their strategies. It’s like having your own role model whose steps you’re trying to trace to get to the same place they’re at.

Needless to say, this would be impossible to carry out with any precision without automation being involved – and this is where the copy trading bot enters the picture. There are few settings involved, which makes it a great option for beginners. Users can set limits, such as maximum investment amounts or stop-loss settings, to control their risk exposure.

Grid Trading Bot

This bot is designed to carry out the grid trading strategy by placing a series of buy and sell orders at incrementally increasing and decreasing value levels, ensuring they remain within the anticipated price range.

As market values shift across this grid, the system automatically sells at higher points and buys at lower ones to capture profit from small fluctuations. This strategy is particularly effective in sideways markets where values oscillate within a predictable range.

Experienced traders can go a step further and employ leveraged grid bots that execute this strategy by adding leverage to the mix – that is, borrowing funds to increase their position size and amplify their profits this way. If you’re a beginner, though, you’ll probably want to stick with regular grid trading to minimize the risks.

Dollar-Cost Averaging (DCA) Bot

DCA bot helps automate another popular crypto trading strategy of the same name. You’ve probably heard the advice to invest in crypto at regular intervals to avoid putting in large sums during the most volatile periods. If crypto trading is something you only dabble in sporadically and don’t want to turn it into a chore, the DCA bot could save you a lot of time and hassle.

All you have to do is specify how much money to invest and how often (for example, $50 every week) and select the asset you want to trade. The bot will take care of the rest! This could be a great addition for risk-averse traders who are in it for the long haul. That said, keep in mind that frequent smaller purchases can lead to higher cumulative trading fees.

Portfolio Automation Bots

One of the biggest challenges high-powered traders face is optimizing their portfolios. The more different assets you have, the harder it is to keep track of them all so you can strategically buy and sell them to reap the highest returns.

Portfolio automation bots (also called portfolio rebalancing bots) help users maintain an optimal allocation of cryptocurrencies in their portfolio. For example, if the value of one coin grows and overtakes the others, the software will automatically sell a portion of said coin and reinvest in underperforming ones. As with other types of bots, you can set your own predefined rules.

Mean Reversion Bot

As volatile as the crypto market is, some believe that it still leans towards a sort of homeostasis: the prices tend to move back to their historical average over time^[2], smoothing out both the peaks and the crashes. The mean reversion bot capitalizes on this principle by executing trades when they move too far away from the average price in either direction to keep the average price stable.

The software calculates the historical average price of the asset over a specified period (for example, the last 20 days or 50 hours) and keeps monitoring the charts. If the price is too high compared to the mean, the bot will sell the asset, expecting the price to decrease. Likewise, if the price is too low compared to the mean, it will place a buy order instead.

Are Crypto Trading Bots Worth It?

If the first step in how to choose a crypto trading bot is familiarizing yourself with all the different types, the next thing you’ll have to do is decide if you actually need one in the first place. Are there any downsides to using such software – and do they outweigh the advantages? Let's hear both sides of the story.

Pros

I’ve already touched on some of the reasons why you might want to consider automating your crypto trading experience, but let me elaborate on these advantages here. If you’re still on the fence about learning how to choose a crypto trading bot – here’s what’s in it for you:

• Speed and precision: Even the most accomplished traders can’t compete with bots when it comes to these two crucial requirements. Trading bots can execute trades in a matter of milliseconds – less time than it takes an average person to click a button, let alone make a decision!
• Efficiency: Crypto trading bots can handle multiple exchange platforms and dozens of assets simultaneously, which would be almost impossible to keep up with unless crypto trading was your day job. Their scaling ability surpasses that of manual trading, too.
• Eliminating emotional trading: None of us are exempt from bias and irrational judgment; FOMO, in particular, is a common obstacle. Trading bots operate by strictly predefined rules and strategies based on algorithms rather than emotional impulses.
• Reducing human errors: Even if you manage to maintain a cool head, any trade is just one typo or misclick away from failure. Automation minimizes or even eliminates these types of mistakes.
• 24/7 trading: The crypto market never sleeps – and neither do the bots! A trading bot can carry out thousands of trades per day, any time of the day.
• Consistency and discipline: Many trading strategies rely on a consistent approach and discipline, but it’s hard to stick to a rigid pattern when life gets in the way. Bots solve this issue by operating at predefined intervals for as long as you need them to.
• Backtesting and paper trading: Humans aren’t the only ones capable of learning from our mistakes: bots are designed to draw from vast amounts of historical data to simulate how well a particular strategy would work on paper.

As you can see, crypto trading bots have quite a lot going for them! Their benefits translate to every aspect of crypto trading across all levels.

Cons

A guide to how to choose a crypto trading bot wouldn’t be complete without shining some light on the downsides, too. Despite all the promises, trading bots aren’t always all they’re cracked up to be:

• Complicated setup: Configuring a crypto trading bot could be a challenge for novice traders; it’s easy to get overwhelmed by the variety of customization options. It also requires an in-depth understanding of technical indicators and trading strategies.
• Costs: While free trading bots exist, many of the popular ones are subscription-based or have a one-off fee. If the bot runs 24/7, you might need to pay for a cloud server. Lastly, bots tend to make frequent trades, which can rack up transaction fees on the exchange.
• Risk of scams: Having access to your exchange account makes bots vulnerable to hacking attempts. What’s more, some bots are intentionally designed to scam users or execute trades that favor their creators.
• Misleading data: Backtesting results can’t always be trusted – they’re relatively easy to manipulate to make a bot seem more profitable.
• Bugs: Like any other software, bots can malfunction because of bugs. They’re more than just a nuisance – some bugs could lead to poor trading decisions or the loss of sensitive data.
• Cryptocurrency restrictions: Many trading bots are programmed to work with specific cryptocurrencies, so if you have a diverse portfolio, you’ll need to find multiple solutions. Older platforms often lack support for newer cryptocurrencies.
• Over-reliance: More automation isn’t always better! Overusing bots can narrow your focus too much, make you feel detached from the market, and miss certain trading opportunities that are easier to spot with manual trading.

Now that you’ve seen both sides of the debate, you’ll have a better idea of what to expect from your journey of how to choose a crypto trading bot.

How to Choose a Crypto Trading Bot? A 10-Step Guide

Suppose you’ve decided that automating your crypto trading experience is worth it after all, time to get to the practical bit of this guide! In this part, I will explain how to choose a crypto trading bot in a series of steps describing all the relevant factors you’ll need to consider.

1. Define Your Trading Goals

The first stage in the process of how to choose a crypto trading bot is having a clear picture of what you're trying to achieve. Here are a few questions you should ask yourself:

1. Are you looking to maximize profits, minimize risks, or automate repetitive tasks?
2. Which cryptocurrencies do you trade?
3. Do you want to make quick, short-term trades, or are you aiming for long-term growth in your investments?
4. Are you still at the beginning of your crypto trading journey, looking for a tool to give you a leg up, or are you a long-time enthusiast who needs automation to help execute more complex strategies or manage a large portfolio?

Understanding your goals will not only help you select the right strategy but the right bot type and the amount of time and money you’re willing to invest in this endeavour.

2. Decide on the Pricing

Crypto trading bots come in a range of prices, from free, open-source tools to premium ones with monthly or annual subscriptions. There are hidden costs to consider, too, such as fees for cloud hosting or exchange usage.

Take a look at your budget and consider your needs. If you’re a beginner who’s never used a trading bot before, you probably don’t want to spend a fortune on your first one, only to realize it’s not the right fit for you. While finding a free crypto trading bot can be more challenging, there are still plenty of options available.

If you can afford it, a higher-priced software might offer advanced features, better security, and reliable support. That said, price isn’t always a reliable indicator of quality. Take a look at the reviews before taking the plunge.

3. Check Exchange Compatibility

If you already have a favorite crypto exchange you don’t want to part with, make sure the bots you’re considering are compatible with that platform. The most popular exchanges like Kraken, Binance, and Bybit have both built-in trading bots and third-party integrations.

4. Consider Ease of Use

Whether you’re researching how to choose a trading bot for beginners or pros, it’s a good idea to prioritize those with a user-friendly design. Configuring a system to match your strategies and needs is complicated enough without having to deal with an unintuitive platform on top of that.

Look for bots with simple setup procedures, intuitive dashboards, and readily available customer support. If you’re an advanced trader, check if the software you’re considering has enough customization options that are easy to access and modify.

5. Research the Bot’s Performance

The crypto trading scene is ripe with exaggerations and unrealistic promises – understanding how to choose a crypto trading bot means being able to cut through those marketing claims and recognize the most valuable tools.

This is the part where you’ll have to do your own research! Check online reviews, user testimonials, and community feedback to ensure consistent and reliable performance. Reputable bots often provide statistics, case studies, or backtesting results.

6. Evaluate the Bot's Security

This is the one factor you should never compromise on. Find out if the bot offers basic security measures like two-factor authentication (2FA) to protect your funds and personal data. For maximum security, I recommend using platforms that allow you to maintain control of your private keys and only interact with exchanges using read-only APIs.

As with the previous step, don’t discount the power of reviews and feedback, and steer clear of bots with a record of breaches or suspicious practices.

7. Check if the Bot Offers Backtesting and Simulation

Look for bots that employ the combination of backtesting and paper trading. The first one involves evaluating a trading strategy against historical market data to check how it would have performed in the past, while the latter uses live data to simulate trades before executing them in real time.

8. Test With Small Amounts

So, you’ve followed the first seven steps and picked up your new trading bot – now it’s time to put it to the test!

Start by investing a small amount of capital to see how the software handles it. Monitor it closely and keep adjusting your strategy and parameters if necessary. Once you gain confidence and learn the ropes, you can trust the bot with larger sums. The gradual approach will prevent burnout and keep you from losing too much money in the initial stages.

9. Set Realistic Expectations

Try not to get too carried away during the honeymoon phase! Remember to keep your expectations in check. While trading bots can be an invaluable tool to help you make the most out of crypto trading, they’re not a money-printing machine or a magic buffer against big-picture factors like unpredictable market volatility.

10. Keep Abreast of Market Trends

Learning how to choose a crypto trading bot isn’t a one-off task but a constant work in progress. Don’t get too comfortable and assume that your first application will still remain the best option in two or five years.

Get in the habit of re-evaluating your goals and needs on a regular basis, and keep up to date with the newest developments so that you don’t miss out on your next bot when it comes your way.

Best Crypto Trading Bots in 2024

If you’re still unsure how to choose a crypto trading bot, let me give you a hand and put a few select picks on the table!

3Commas: Best Crypto Trading Bot Overall

If you’re looking at how to choose a trading bot for crypto, you can’t go wrong with this one. Launched in 2017, 3Commas offers a wide assortment of options to maximize profits and minimize risk, along with several automation tools, including the DCA Bot and Grid Trading Bot. It also comes with extensive portfolio management features.

3Commas has four pricing plans: Free, Pro ($29/month), Expert ($47/month), and Asset Manager ($374/month). It supports 14 major exchanges, including Binance, Bybit, KuCoin, Coinbase, Kraken, and HTX.

Pionex: Best Free Crypto Trading Bot

Free bots can be a hit-and-miss affair. However, if you’re struggling to decide how to choose a crypto trading bot free of charge, this is one of the most reliable options. Pionex is a platform launched in 2019 with the goal of making automated trading available for everyone. It features 16 free trading bots for spot and futures grid trading.

The only additional charges you’ll encounter are the trading fees: Pionex applies a 0.05% maker and taker rate. Unfortunately, since Pionex’s trading bots are built into the platform, they don’t support other exchanges.

CryptoHopper: Best Crypto Trading Bot for Beginners

Novice traders will have different priorities from seasoned investors – if you fall in that category, it’s important to find a bot with a lower barrier of entry. CryptoHopper is one of the best picks for those unsure how to choose a trading bot for beginners. It comes with pre-configured settings, backtesting and paper trading, and a robust tutorial section to help ease you into the world of automated trading.

CryptoHopper has a free 3-day trial and four pricing tiers: Free, Explorer ($24.16/month), Adventurer ($57.50/month) and Hero ($107.50/month). It supports over 18 exchanges, including Binance, Coinbase, Bybit, KuCoin, Bitfinex, and Kraken.

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Conclusions

Hopefully, my guide on how to choose a crypto trading bot was informative enough to get you on board! Even though the process isn’t as cut-and-dry as this checklist might make it seem, you can treat it as a blueprint until you develop your own workflow through trial and error.

To sum it up – crypto trading bots are programs that automate the trading process by processing vast amounts of market data and executing trading decisions based on the parameters you set, as well as the trading strategies they’re designed to accommodate. With the help of these applications, you’ll be able to monitor the market 24/7 and effectively manage your portfolio, no matter the size and asset diversity.

On the flip side, trading bots are still susceptible to security concerns, and their predictions aren’t always accurate. The process of how to choose a crypto trading bot involves going over multiple factors, such as user-friendliness, cost, reputation, security measures, and features like backtesting. Alternatively, if you don’t want to deal with trying to find third-party solutions, exchanges like Binance come with their own built-in bots that are free to use.

The content published on this website is not aimed to give any kind of financial, investment, trading, or any other form of advice. BitDegree.org does not endorse or suggest you to buy, sell or hold any kind of cryptocurrency. Before making financial investment decisions, do consult your financial advisor.

Scientific References

1. A. Kabašinskas and K. Šutienė: 'Key Roles of Crypto-Exchanges in Generating Arbitrage Opportunities';

2. M. Padysak and R. Vojtko: 'Seasonality, Trend-following, and Mean reversion in Bitcoin'.