A crypto trading bot can be a great asset that puts your strategy into motion, enhances and speeds up your trading, and boosts your profit. The focus of this article, however, will be the other side of the coin. We will focus on instances when bots are not bringing but rather taking away a trader’s profit. We will look into some of the common reasons for losses and explore the mistakes, which can be a consequence of both human and AI errors.
Reasons Why Bots Lose Money
Even though bots can be a great tool, the most responsibility is on the traders themselves. There are many misconceptions about crypto trading bots, mostly related to unreal expectations from them.
1. Lack Of Testing Skills
Testing the market is an important factor in whether you profit or lose over time. This is typical human error in most cases and not the bot’s fault. The two main types of testing are backtesting and forward testing.
For backtesting, you apply your trading strategy (and also your bot) to historical market data, and try to draw conclusions for the future market movement. One of the dangers here is false conclusions because people tend to think that if a strategy has worked before, it will work again, which may or may not be true. Backtesting skills are acquired by the studious analysis of historical data and efficiently practicing trading with or without bots.
Forward testing needs to be implemented as a complement to backtesting to get more accurate results. It is also called paper trading, and it is basically trading in the real market with virtual money. Here the usual misconceptions are underestimating the differences in the real market. For example, the trading fees and slippage are not accounted for in paper trading, nor are the emotional and mental hardships that happen when trading for real money.
2. Choice Of Minimum Deposit
The amount you deposit and trade with, i.e. your bankroll, is not arbitrary and trivial. In fact, it is closely connected to your trading results and the profit you make. How? Your bankroll must be adjusted to your skill level, trading experience, and the trading bot. Here are two probable scenarios as an illustration:
If you are new to trading, the worst thing you can do is start live trading with large amounts and huge bankrolls. That way, you can blow up your account very fast and you won’t have enough funds to get back on your feet.
You are probably thinking about earning money, and how one can earn money without depositing and trading large. Besides, most bots are automated and should do most work for you, right? Wrong. The type and quality of the bot you use are not very relevant here. You can’t earn anything without a balance on your account and you will probably end up giving up on trading just like many did before you. So in this example, starting big as a beginner is a huge mistake.
On the other hand, if you are not a beginner, you probably have a good quality automated trading bot, which has a paid subscription and is probably not cheap. If you hold on to small trades, you won’t have enough money to cover your subscription fee, let alone make a profit. You also lose the possibility of generating substantial profit in general.
That’s why a large bankroll is better in this case. You still don’t have to go with large investments. Trades are easier to manage when you are not at the edge of going broke, and you have a chance of earning a lot.
3. Lack Of Optimization Skills
You need to optimize your trading strategy by looking at vast amounts of data and tweaking your trading bot accordingly. A typical danger is overoptimization in backtesting. It occurs when we modify our strategy too much and make it apt just for historical data. Then we make a false conclusion that it will have the same scores in the real market. The optimization should of course be done, but not too little and not too much, and that comes with experience.
4. Wrong Bot Service Account
You need to inform yourself about a bot platform before paying for it. Carefully read the account types and payment plans, and decide what is best for you. You need to take your time to compare different services instead of just going for any random bot.
5. Scam Bots
The market is flooded with hoax bots that want to steal your money and data. What is worse, most of them are not reviewed enough and have contradictory reviews. For example, Crypto Engine is a suspicious trading bot that boasts a crazy success prediction rate of over 90%. It is hard to find any reliable information about it. There are both bad and good reviews online but most of them seem artificial and biased. Here is one review of Crypto Engine you can start from, and also check out cryptodaily.se for an extensive list of reviewed bots.
All in all, always make sure to use trusted trading bots. It is not only the rating that is important; it is always best to look for a bot that has a large community behind it and a large number of good reviews because it is hard to fake 500 or 1000 reviews.
About the Author:
Sigrid Jonasson, contributor at cryptodaily.se.
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