Automated trading refers to the use of trading robots to analyze the markets and yield trade signals on behalf of the trader. If a robot fulfills these functions, it is called a semi-automated robot. There are also fully automated robots that, in addition to generating signals, will execute trades on behalf of the trader, operating completely autonomously. In the forex market, these robots are commonly called expert advisers (EAs), especially on the MetaTrader platforms.
Crypto vs. forex bots – how do they compare?
The concept of trading bots is more common among forex traders. To that end, there are several robots available for the forex market, some pre-programmed and sold at a fee, while others are created by traders themselves. Of the latter type, most will require the trader in question to have working programming knowledge, but several tools help traders build EAs without the need to write code.
In the crypto space, trading robots are somewhat different. These robots will mostly be third-party software that utilizes special algorithms to scour the crypto market for trade opportunities. These bots will also require API keys to connect with exchange platforms, unlike forex robots which are installed directly on the platform.
So what brings about these differences? Let’s look at the main reasons why crypto bots and forex EAs differ.
Reasons why forex and crypto bots are inherently different
1. Nature of assets
By definition, the fiat currencies traded in the FX market and cryptocurrencies are both means of exchange. However, the practices of both markets make them essentially two very different assets. In the FX market, for example, currencies are traded in pairs, and brokers act as middlemen to facilitate this trade.
Cryptocurrencies, on the other hand, entail buying a currency and selling it later at a profit. What’s more, there are often no middlemen in the crypto trade. These currencies are sold on an exchange by use of smart contracts, which keep both parties honest.
Further, both of these markets differ in the liquidity levels they offer, which necessitates the use of different robot types for each market. What’s more, a forex trader intending to try out crypto trading would have to undergo some training before switching markets, as their functioning is somewhat different.
2. Traded volume differences
The forex market is the largest market in terms of traded volume. Traders need a large volume of capital as currency pairs are sold in lots, which comprise 100,000 units to enter this market. For this reason, it is not uncommon to find forex brokers who offer high leverages, some up to the tune of 1:1000. This is done to enable traders with low capital to open larger positions.
This leverage may vary from region to region, depending on the regulatory service that oversees a particular jurisdiction. This is because as much as high leverages can amplify one’s profits, they can also greatly increase one’s losses.
In the crypto markets, margin trading is not a common phenomenon. If and when it is offered, it is usually relatively low leverage, such as 1:3. This can be attributed to the fact that there are no minimum limits on the amount you can invest in crypto, which enables even small investors to participate in the trade. Therefore, whereas you can adjust your forex robot to trade on leverage, more often than not, this is not possible with crypto bots.
3. The complexity of the markets
In the forex market, price action depends on a myriad of factors. In addition to chart patterns, volume fluctuations, and the like, traders often have to keep up with fundamental news such as central bank decisions and monetary policy. Therefore, developers of forex robots and the traders who utilize them have to keep in mind the complexity of this market when considering automated trading.
The crypto marketplace, in contrast, hardly moves in line with fundamental news. Price predictions of cryptocurrencies mostly rely on technical analysis, and developers of crypto bots create them with this in mind.
4. Different asset ownership requirements
Usually, forex traders will leave the entirety of their account balance in their brokerage account so as to make forex trading easier. When utilizing robots, they grant them unfettered access to these funds to trade with as they see fit.
When it comes to crypto, any holdings kept on the exchange platforms are often at risk of theft from hackers. What’s more, cryptocurrencies can be traded on CFDs, where traders bet on price differences without actually owning the underlying asset. Therefore, a crypto bot developer would have to take these asset ownership practices into consideration, making such a robot totally different from a forex bot.
5. Variations in volatility
More often than not, the crypto price charts experience way more volatility than those of currency pairs. It is not uncommon for a cryptocurrency to fall or rise 20% in value over the space of a day. In the forex market, such an occurrence would be largely newsworthy. Therefore, crypto bot creators have to utilize strategies that take these high volatility levels into account, and chances are, such strategies would not work on the FX market.
Further, volatility in the FX market varies with time, as different sessions experience different volatility levels. Therefore, an EA would have to consider such trading session differences, which are not experienced in the crypto markets.
Verdict: Which market is better suited for automated trading?
We have established that the practice of automated trading in forex takes a completely different approach to that of cryptocurrencies. Due to the complexity of the forex market, EAs are often used by short-term and long-term traders alike. In the crypto space, long-term traders may not see the need to use robots, as their strategies do not require close scrutiny of the markets. However, no one market is better suited to automated trading, and the choice to utilize a robot boils down to a trader’s individual needs.
