As the crypto currency markets continue to grow by leaps and bounds, more and more investors and traders are beginning to consider the use of automated trading bots.

What is an Automated Trading Bot?

An automated trading bot is a computer program designed to create buy and sell orders and automatically submit those orders to an exchange. The computer program will automatically generate orders based on a predefined set of rules using a trading strategy which is based on technical analysis, advanced statistical and mathematical computations or input from other electronic sources. This set of rules is an algorithm, and trading based on a set of predefined rules is called algorithmic trading, which is why the use of trading bots is sometimes referred to as algorithmic trading even though technically, it would still be considered algorithmic trading if the trades were executed manually.

Why Would You Want to Use a Trading Bot?

The number one reason you may want to use a trading bot: you have to sleep sometime. Unless you are willing to only trade your national stock markets, you can’t possibly stay awake all the trading hours that are available to you. High speed internet connections have made it feasible to trade stock markets worldwide, futures markets are open 23 hours/day, five days a week, forex markets are 24 hours/day, five and a half days /week. And now, with the proliferation of crypto currencies, you have a market that trades 24 hours/day seven days a week without stopping. Trading bots give you the ability to trade while you sleep!

Trading bots can analyze and keep track of more markets, indicators and positions then humans, increasing the number of opportunities that can be taken. Imagine a person trying to track the prices of 20 different crypto currency pairs across a dozen different exchanges looking for arbitrage opportunities, while simultaneously grid trading and doing market making on other exchanges. Impossible right? Its all in a days work for a trading bot (or in this scenario, three bots). That brings us to our next reason, you can use more than one trading bot at a time. You could literally have dozens of them trading different strategies, on different exchanges, all at the same time.

They are faster and more efficient than humans. In fast moving markets, by the time you have calculated where to put your stop-loss and take-profit orders, the market has blown right passed you. Another missed opportunity. Trading bots don’t miss trades because the market moved to fast, they had to go to the bathroom, or answer the door.

Trading bots don’t have emotions. They don’t get scared or greedy. They don’t think about the car payment that is due next week. They just trade according to the rules you have established. They don’t second guess the rules, or bend the rules. They ALWAYS follow the rules!

In order to make use of a trading bot, a trader has to first create trading strategies that can be simplified down to a handful of rules that can be programmed. This gives the trader a much greater understanding of exactly how and why trade decisions are being made.

How Does a Trading Bot Work?

All algorithmic trading bots perform three basic functions, identify buy and sell signals, calculate position size, and trade execution. What is involved in identifying signals depends to a great extent on how the bot receives information. A bot that is programmed to receive external signals from a signal service or copy/social trading simply accepts the buy or sell signal and proceeds to the next step. A customized trading bot may receive market data from an exchange and then use that data to calculate indicators (such as a moving average or bollinger bands). It then monitors those indicators watching for certain criteria to be met (such as a cross of two moving averages). Once the buy or sell signal has been generated, it will move on to the next step. Position size is determined by calculating the account balance and then applying predetermined rules as to what percentage of the portfolio should be put at risk on any given trade. Once the position size has been determined, the trade order is executed on the exchange. The important thing to remember is that the entire process may happen in the blink of an eye.

How Does Trading Crypto Currency With a Trading Bot Work?

There are a multitude of crypto trading bot services in the marketplace that facilitate automated trading. These companies maintain relationships with crypto exchanges and have developed interfaces with which they can access an exchange via the exchange’s API (Application Programming Interface). Once you have created an account on the website of the trading bot service, you then connect your exchange or exchanges to their service via API. This allows the trading bot to receive balance and market information from the exchange and to execute trades in your account. It is very important when setting up these connections that you not activate withdrawal features. Without withdrawals activated, a bad actor gaining access to your account at the trading bot service would not be able to access the funds in your exchange account. Your funds stay in your account at the exchange at all times. Now, with the exchange connections in place, you can select a trading bot that has been pre-configured by the trading bot service, or custom design your own. The trading bot platform generally will have several pre-configured bots to choose from that trade based on various strategies. The most common ones include: arbitrage bots, market maker bots, grid bots, etc. Not all providers give you the ability to create customized trading bots, but the ones that do will either provide you with a template that can be copied and modified, or allow you to create your bot from scratch using a scripting language such as C+ or Python.

Can You Create Your Own Bot?

If you know how to code, or are willing to learn how to code, then yes, you can create your own trading bot. The better question is: should you create your own bot? The answer to that question has to do with what resource you have more of, time or money. If you already know how to code AND you are an experienced trader AND don’t have much money, then creating your own trading bot may make sense. Otherwise, you will be spending a lot of time determining what strategy you want to trade, how that strategy works, learning how to code, finding and cleaning suitable data to backtest, etc, etc. Meanwhile, how much opportunity to profit are you passing up while you spend time learning, when you could just sign up to a service, connect it to your exchange, pick a pre-configured trading bot and be trading?

Is Using an Automated Trading Bot Legal?

Absolutely! Let’s put this in perspective. You set your coffeemaker to start brewing your coffee at 6:30 AM and set your alarm clock to go off at 6:45 AM. You do this so you can sleep that extra fifteen minutes rather than making the coffee manually. Is this legal? Of course. If you are trying to make a two percent profit on an investment position, you can watch your computer screen all day waiting for your position to reach your target and manually close out the position. Or, you can use a computer program to do exactly the same thing, while you are at the movies. In either scenario, you are simply automating something you would otherwise do manually. The end result is the same.

Exchanges actually encourage the use of automated trading bots. 99% of all stock transactions on Wall Street are performed by trading bots. The most popular forex software, MT4, has automated trading functionality built into it. Crypto currency exchanges build APIs to allow trading bots access to their systems. Exchanges encourage the use of trading bots for two reasons, liquidity and revenue. Someone using a trading bot creates more liquidity (think limit orders) than a manual trader who closes out most or all of his positions when he goes to bed. A manual trader generates commissions or transaction fees only when he is actively trading, while a trading bot operates twenty-four hours a day. Everyone benefits from the use of automated trading bots. The trader makes money while he sleeps, and the exchange has higher liquidity and generates more income. So, yes. Trading bots are completely legal.

How Much Do Trading Bots Cost?

If you create your own trading bot, obviously, the cost is zero (not considering your time and missed opportunities). The various trading bot services range in cost from zero to a couple hundred dollars per month. In general, the free services are either limited by time, such as a two-week trial. Or, they are extremely limited in functionality. The concept is the same. They provide you the service for free as an inducement to try their system, with the expectation that you will upgrade to a paid version at some point. Paid versions are typically offered in several tiers, with the lower, less expensive tiers having somewhat limited capacity, and successively higher tiers reducing limitations and adding features. The low end of the range is around $20/month with basic functionality. $50-100/month for full featured plans. And $100+ for advanced, institutional or unlimited plans. Most providers offer discounts if you buy an annual subscription.

Are Using Trading Bots Profitable?

The answer, of course, is: it depends. Generally speaking, taking a trading system that doesn’t make money manually and automating it, isn’t going to make it profitable. It will just lose money faster. If your trading strategy would make money, if you could keep your emotions out of the way and not deviate from the rules, automating it would definitely help. If you have a trading strategy that consistently makes money when you trade it manually, automating it will allow you to magnify the gains based on being able to operate 24/7, and the possibility of accessing more exchanges and/or trading pairs. There are several strategies that would be extremely difficult to do manually such as arbitrage, grid trading or market making. Properly configured trading bots that automate these strategies can be profitable under certain market conditions. But, you can’t set it and forget it. You need to monitor the bots performance and the market conditions and shut it down when market conditions are not favorable. With the right strategy and the right market conditions, a trading bot can generate very nice returns. Just don’t expect it to perform miracles or make you rich overnight.

How to Determine Which Trading Bot is Best

There are numerous factors involved in selecting the best trading bot service. The most important considerations for most traders are the following:

Strategy: Do you have a strategy that you want to automate? If not, you have the option of picking a bot that the service provider has pre-configured for a specific strategy such as market making, arbitrage, grid trading, etc., or you can do copy trading where you copy another successful traders bot, or use their trade signals.
Leverage: Do you plan to do margin trading or trade futures or options? If so, it is important to make sure that the trading bot service you choose supports this. And, you need to make sure they support an exchange that facilitates leveraged trading.
Exchanges: Which exchanges are supported by the trading bot provider? If you plan to do leveraged trading, make sure they support exchanges that offer it. If the exchange you currently use isn’t supported, are you willing to change? Some service providers have different trading strategies available depending on what exchange you select.
Operating Platform: Some trading bot providers operate a cloud-based service while others have you download and install software on your local machine. There is a trade-off between ease of use and security to consider. With cloud-based systems, there is nothing to be installed or maintained and it can easily be accessed from any device, from anywhere. Whereas, software installed and maintained locally is not quite as convenient, it is more secure because all data resides on your local machine. With cloud-based systems, your billing and trade data could potentially be compromised by a hacker or rogue employee.
Security: Do they encrypt your data stored on their servers? Do they support two-factor authorization? What is their privacy policy?
Language: What coding language does the trading bot provider use? This is a major factor if you know a particular language and are planning to create a customized strategy.
Cost: The biggest factor to consider here is the size of the portfolio that you intend to trade. The smaller your portfolio, the more important cost becomes. It would be silly to spend a hundred dollars a month for a trading bot to trade a three hundred dollar account. But, the same hundred dollars a month would be an insignificant expense for a hundred thousand dollar account.

Conclusion

If you are new to the automated trading bot arena, there is quite a bit to learn, and there are many pitfalls to be avoided. There are dozens of trading bot providers in the market to choose from, and the vast number of options and features they offer can be overwhelming. But, for those traders that persevere and are ultimately successful in utilizing trading bots, the rewards can be substantial.