There are many strategies for trading on cryptocurrency markets. Today we’ll talk about a combination of trading strategies in the following order:
- AI Trading bots
Arbitrage trading is the act of simultaneously placing bid and sell orders of the same digital pair, on two or more exchanges, to buy low from one exchange and sell higher to another.
The decentralization of Bitcoin’s Volatile markets often results in varying prices reported on different exchanges. Since each exchange shows values bitcoin differently, unlike traditional trading markets, arbitrary opportunities are very common.
Unlike traditional markets, arbitrary opportunities are very common in bitcoin markets. Exchanges report very different bitcoin prices for the following two reasons:
- Exchanges often operate on sluggish web technologies, where volatile price corrections can take a considerable amount of time.
- The decentralization of Bitcoin’s volatile markets often results in varying prices reported on different exchanges.
The Causes of Bitcoin’s Price to Rise and Fall
Bitcoin’s rapid price volatility has often baffled even the most experienced economists, especially as its price…
What is grid trading?
Grid trading is an arbitrage strategy that generates profits from a currency’s price swings within an expected price range. The grid trading technique benefits on natural price volatility in markets by opening buy and sell orders regularly above and below specific limits.
Pros and Cons
Grid is like the hedging method (opening both long and short positions), except the intention is to buy and sell order continuously, within a pre-configured price ranges A sophisticated trader can achieve the best results from trailing grid arbitrage in both volatile and nonvolatile markets, as long as price swing highs remain consistent or rise.
To better understand these trading strategies, we will talk about two typical market conditions. Let’s differentiate between two examples of good vs bad market conditions for implementing grid strategy in a bitcoin exchange.
Pro: Ranging Market
The advantage of grid trading is that it requires little forecasting of market direction. In addition, grid trading offers one of the easiest and time-tested arbitrage trading strategies.
Con: Hype Market
The biggest drawback is the risk of sudden price drop, without activating stop-loss order limits. This strategy will lose its effectiveness if the price falls rapidly. If the downtrend persists, without supportive swings, the cumulative losses from all open positions will increase exponentially.
How can an AI trading bot help?
The automated Grid Strategy
AI trading bots makes 24/7 trading automation possible.
Programming an AI to place orders automatically enables a trading account to act quickly on arbitrary trading opportunities. By carefully setting high and low grid thresholds, the AI follows a pre-defined trading pattern and lowers risks by removing emotion from the equation.
Note: Correct configuration of stop-loss orders and automatic execution of exit strategies is critically important to profit from automated trading bots.
Automating configuration adjustments over time
Price tracking enables the trading bot to follow the price and scale the grid in sync with volatile price ranges. Here’s how it works:
For this to be possible, the trading account will need enough funds available to place bids when an exchange’s price is below the bid limit. When the price of the currency exceeds the maximum bid limit, the bot will cease to place bids until the price falls below the max bid limit.
The bot will begin and continue selling to an exchange as long as its price remains above the minimum sell limit. When an exchange’s price passes the limit, the bot will adjust the price and limit according to its pre-configured settings.
RISKS of Arbitrary and Automated Trading
Arbitrage trading can be extremely risky
Arbitrage trading is not appropriate for someone of limited resources and limited investment or trading experience and low risk tolerance.
You should be prepared to lose all staked funds. In particular, never risk funds set aside for activities like retirement savings, student loans, second mortgages, emergency funds, education, home purchase, or required living expenses.
Arbitrage trading requires knowledge of exchange markets
You should have appropriate experience before engaging in arbitrage trading.
Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a stock suddenly drops, or if trading is halted due to recent news events or unusual trading activity.
The more volatile a stock is, the greater the likelihood that problems may be encountered in executing a transaction. In addition to normal market risks, you may experience losses due to system failures.
Arbitrage trading generates substantial commission costs
Arbitrage trading involves aggressive trading, and generally you will pay commissions on each trade.
The total daily commissions that you pay on your trades will add to your losses or significantly reduce your earnings.
For instance, assuming that a trade costs $16 and an average of 29 transactions are conducted per day, an investor would need to generate an annual profit of $111,360 just to cover commission expenses.
Arbitrage trading may result in losses above your initial investment
When you trade with funds borrowed, you can lose more than the funds you originally placed at risk.
A decline in the value of the securities that are purchased may require you to provide additional funds to the firm to avoid the forced sale of those securities or other securities in your account.
Short selling as part of your arbitrage trading strategy also may lead to extraordinary losses, because you may have to purchase a stock at a very high price in order to cover a short position.
It is essential to know that the trailing grid trading strategy does not guarantee a stable income under all market conditions. If you want to use this option effectively, you need to understand the basics of trading and the current market conditions.
Note: There is no 100% confirmation of the current market condition because it can be different from the individual perspective. For example, the charted condition on 5-minute intervals in a 1-hour period may look unpredictably different than those on 1-day intervals in a 30-day period.