Beginner’s Guide to Crypto Trading Bots — Part 1 — Important Terms
#Botlife
#Botlife
Before you jump into running crypto bots, it is important to understand a a few key terms and principles so you can differentiate bots and plot your strategy.
This story series will take you through some foundational ideas when operating trading bots and then launch into a run down of each common type of trading bot explaining it in detail.
I will be using Pionex Exchange for my examples, but many of the bots will have very similar settings on other exchanges.
Here are the most important terms you will need for this journey.
Feel free to reference it if you need to while while reading the other stories in this series.
Basic Terms:
Trading Bot
Software that automatically trades for you on an exchange.
Bots often operate according to parameters you configure and now — can sometimes be automatically configured by AI to maximize your trading potential, taking a lot of the heady math required out of the trader’s hands.
Exchange
Platforms where users can buy, sell, and trade cryptocurrencies, such as Pionex, KuCoin, and Coinbase.
KYC
Know Your Customer. This refers to security protocols now being implemented by crypto exchanges worldwide that verify the identity of the trader before allowing full access to the exchange. If you are ever asked to KYC, this means you need to provide proof of your identity to get full access to the exchange. This practice reduces fraud and crime.
Spot-Trading
Spot trading is the exchange of assets between buyers and sellers at the going rate in the market, facilitated by an Exchange. You will recognize this from traditional stock markets — this is where you can set limit orders, and market orders.
Limit Order
An agreement to purchase or sell a cryptocurrency at a specific price. Purchase / Sell will not occur if the price is not met.
Market Order
An agreement to purchase or sell a cryptocurrency at the immediate market price at the time of purchase. Purchase will happen even if the price slides a little in either direction, and there is a potential for slight variance in what you will receive.
Trading Pair
Every bot requires a trading pair. The trading pair determines which TWO currencies will be bought/sold with your trading bot.
Just like a spot-trading account — with every bot, there can only be two assets represented.
Stablecoin
Stablecoins are coins that are matched to the native currency, usually through holding real bonds*, so that the value is constantly equal to the value to the native currency. For the United States, this means coins like USDT and USDC are intended to remain pegged to the US Dollar, evenly with an average variance of +- $0.01
Fiat Currency
Your native country’s normal government issued currency. In the near future, countries themselves may adopt or release their own government-issued or sponsored stablecoins to modernize their infrastructure.
Altcoin
Any cryptocurrency other than Bitcoin. This includes coins like Ethereum, Litecoin, Ripple, and literally thousands of others.
HODL
“Hold on for Dear Life” — an intentional mispelling of HOLD — a little crypto joke for holding crypto no matter what it’s value does. Long term positions in cryptocurrencies.
Position
The value of any given asset that you hold is your position with that crypto. In relation to a trading bot it is the balance you have invested that is active in the bot’s open orders. If my bot has $10,000 invested, and it has only placed orders for $8000 of that, then my position is $8000.
When the bot invests ALL of my balance in open orders, it has invested my “Full Position”.
Arbitrage
Arbitrage takes advantage of price variations between the same item on different exchanges, or different assets on the same exchange.
To put it another way, it entails purchasing an asset in one market at a lower price and selling it in another market at a higher price, taking advantage of the price difference. Bots exist because abitrage is possible to automate.
Market inefficiencies, such as gaps in liquidity across exchanges or delays in price adjustments, aka — “slippage” — gives rise to arbitrage opportunities.
When running crypto bots, because you can not only pair with native currency, but also against other currencies, many bots refer to their activity as arbitrage.
Whale
A trader or investor who holds a significant amount of cryptocurrency, capable of influencing market prices with their large trades. A whale selling a chunk can cause a price fluctuation that triggers a sell off. Similarly, a whale purchasing a giant chunk can cause a price spike with people anticipating an immediate increase.
Wallet
Software or hardware used to store, send, and receive cryptocurrencies securely.
Wallet Address
A unique identifier used to send and receive cryptocurrency transactions, similar to a bank account number.
Spread
Applied to the market as a whole, this is the difference between the highest price and the lowest price in a market.
It represents the liquidity and efficiency of the market.
When talking about spread in relation to a crypto trading bot, this term is a reference to the price range the bot is operating within, which can be impacted by different settings in each bot configuration.
Volume
The total amount of a cryptocurrency traded within a specific period — or, how much crypto is being bought and sold at any given time.
Liquidity
The ease with which an asset can be bought or sold without causing significant price movement.
High liquidity indicates a deep market with many buyers and sellers.
The smaller a coin’s market cap and volume within various exchanges, the lower the liquidity.
Volatility
The degree of variation in the price of a cryptocurrency over time.
Higher volatility indicates larger price swings and greater trading opportunities (but also higher risk).
Trading Bots are made to thrive on volatility.
Bear Market
A market characterized by declining prices and pessimism among investors, leading to a prolonged period of downward price movement.
Bull Market
A market characterized by rising prices and optimism among investors, leading to a prolonged period of upward price movement.
Flat Market
A market characterized by small fluctuations in prices and optimism among investors due to a perception of stability.
ROI
An acronym for “Return On Investment,” representing the percentage increase or decrease in the value of an investment relative to its initial cost. Often people will be referring also to the amount of TIME it takes to get this return.
Advanced Terms:
Leverage
Leverage is the practice of borrowing funds from lenders to increase the size of a trading position beyond what would be possible with one’s own capital alone. This borrowed capital allows traders to amplify their profit potential. This is facilitated by the exchange itself, and does not require banks or third party institutions.
Futures Trading
Futures trading involves an agreement to buy or sell a specified asset at a predetermined price on a future date, betting on a price rise, or a price fall. In this market, you can access leverage to increase your total position and multiply your profit rapidly, Conversely this can also wipe you out faster if miscalculations are made.
Margin
To open a leveraged position (Futures Trading), traders must deposit a portion of the total position size as collateral, known as margin. The required margin is typically a percentage of the total position value and varies based on factors such as the asset being traded and the level of leverage.
Liquidation
If the market moves against a leveraged position and the losses exceed the trader’s available margin, the broker may issue a margin call. This requires the trader to deposit additional funds to meet margin requirements and prevent the position from being liquidated. If the trader fails to meet the margin call, the broker may forcibly close the position (liquidation) to limit further losses.
Disclaimer : the author is aware of and knows how to explain the concept of futures, but has only shorted one token so far. Futures seems a lot more like gambling than my current strategy, so I have not yet started mastering that Arte. I do not recommend getting into futures trading without a mentor or enough paper trading experience to become very confident!
This list may or may not be complete. If there is a term you think should be added, feel free to drop it in comments and I will be happy to add it to the list! I may update this list of terms as time goes on.
Continue to Part 2 of this series :
Beginners Guide to Crypto Trading Bots — Part 2 — Trading Pairs
Defining Your Trading Assets.
Do I want more Crypto? or More Fiat Currency? That is the question.medium.com
Thank you for reading!
Until next time….
Onward and Upward Everybody!
-Chris
Automated Income Lifesyle w/ Chris Morton YouTube
#tradingbots #tradingterms #tradingglossary #bitcoin #altcoins #cryptotrading