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Kc  · 09/01/22

Pros And Cons Of Automated Arbitrage Trading

Altcoin Trading Blog
05/29/22 · Crypto trading 101
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Are emotions getting in your way of making profitable trades, even in arbitrage trading?

Or are you new to crypto trading and just wish for an easy strategy that can bring returns from the trading floor? Then you should know that automated arbitrage trading can take care of your trading business while concentrating on other crucial things.

Arbitrage trading takes advantage of market inefficiencies caused by crypto market volatility to make profits. It’s a low-risk and low-return investment strategy that entails shopping for price discrepancies in several financial markets and buying when low and selling high.

So, you don’t need to sharpen your trading skills to enjoy the market price swings. When you add automation to arbitrage trading strategy, you’re handing over the analysis of the markets to programmed software.

The software will do the hard work by matching your trading frameworks with favorable crypto market conditions to profit.

However, automated arbitrage trading depends on the intermediary markets and crypto exchanges who give you access to trading. So, you must begin by looking for an arbitrage trading platform before introducing arbitrage bots in your crypto trading business.

In this article we will elaborate on the pros and cons to using an automated arbitrage trading strategy. Read on.

Pros

Listed below are the pros of using automated arbitrage trading.

  1. Controlled Emotions

    The crypto market price action moves very fast for you to spot trading opportunities, and it can throw your trading strategy off and result in losses. And even if you get a lucky strike, your emotions might get the best of you and prompt you to press the panic button and leave the trading floor just before your trades turn blue.

    With automated arbitrage, your emotions are part of the trading conditions. The software will comb through the market structure or formation to find clear criteria to open trade positions following your rules. Bots such as Pionex won’t hesitate to execute a trade if opportunities are to capitalize on the market swings.

  2. Allows Backtesting and Dry Runs

    The viability of automated arbitrage trading relies on the historical data collected from the market price. You can review the previous market price actions to tweak your automated arbitrage strategy.

    In addition, the software can’t guess which signals to follow when entering the trading floor. So, you have an opportunity to define what your automated arbitrage trading should be and backtest against the market history before going live. It’ll furnish the software with guidelines and help you derive realistic expectations from using the strategy.

  3. Diversification

    Diversification is a classic strategy that’s applicable in automated arbitrage trading too. You have an opportunity to open multiple trade accounts, spread your risks across several cryptoassets, and hedge your trades.

    For instance, you can run one arbitrage trading bot on markets denominated in USD or a fiat-pegged stablecoin and another bot on markets denominated in BTC. This way you can collect profits in both USD and BTC.

    In effect, this is similar to running a DCA bot in Bitcoin and will create diversification in the assets that you plan holding for the long run.

  4. Command Bound

    Once you set the arbitrage rules, the system is command bound and will automatically follow the predetermined trading system. The software will keep calm when the market becomes volatile and maintain discipline by referring to your rules. Also, it’ll be sharp to detect false moves and panic to exit a trading position.

    Likewise, if there’s an opportunity to capitalize, it’ll stick to your instructions and attempt to go overboard by opening more trades than your account can handle.

Cons

If there are advantages to using the automated arbitrary system, there are also cons, and here are some of them.

  1. Mechanical Hitch

    The internet is a crucial component for automated arbitrage trading, and it can create other failures in your strategy. You can set your software to trade at the next opportunity, but a human error in the bot’s code will sabotage your plan. This is why backtesting of your automated strategies is so important.

    But even so, exchange systems might create a mismatch between your automated arbitrage set-up and the market executions. Such mechanical hitches can result in significant losses and may discourage you from trading.

  2. Constant Monitoring

    This is especially relevant if you run a custom arbitrage bot. If you do not want to waste time on tech monitoring, use a commercial trading bot platform that offers arbitrage strategies.

    The thing is, once you have a test run of the automated trading system and it’s working, you will assume that things will remain constant.

    However, even automated arbitrage trading systems can encounter technical problems and leave your trades hanging on the trading floor. It’s prudent to monitor the functionality of your automation setup and ensure it serves its purpose.

  3. Overdependency

    It’s easy to develop overdependency on the automated arbitrage trading systems and throw caution to the wind when going trading live.

    In addition, if technological advancement will not make your automated arbitrage system obsolete, then the increased amount of arbitrage traders will. Therefore it is best to make use of the opportunity while it lasts, but avoid relying on it solely.

Final Thoughts

The crypto markets experience high magnitude volatility for humans to keep up with the price action. If you’re careful, you can enjoy a good stint in the market and come out with profits.

Luckily, the crypto landscape allows trade automation to help you capitalize on the market inefficiencies. But you must learn how they work and what are the exchange platforms that encourage traders to use software for arbitrage trading.


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