Have you ever heard about “whales” in the cryptocurrency market? The big money Bitcoin players supposedly have almost mythical powers of moving the price up or down at any time. Moreover, they are often used as an excuse for losing money on the market. Unlike whales, bots are not mentioned as much. In fact, most people are not aware of bots, or at least know about them partially. There seems to be low interest in automated trade programs (trading bots) that enable gaining a profit. Really? Free money?
Well, it is not as simple as it sounds. Though needless to say that trading bots, online 24/7 computer programs, are an exciting concept.
How does a bot work?
Using technical analysis and machine learning, bots can create optimal trading strategies in order to exploit the market. When compared with the human trader, the bot follows only a limited set of rules that dictates its actions.
How to make one?
There are several online services that help you to create a bot of your own. If the task seems too hard, there is an option to rent a bot from a “botsmith.” Several online portals serve as a marketplace, where bots can be bought or rented for a monthly fee. They perform a wide variety of tasks, and can also be custom, depending on the preference of the customer.
The first task is to set rules a bot will follow. This means determining points of entry and exit to the market. To do so, one can use, for example, a crossover of Moving Average (MA) and Exponential Moving Average (EMA).
MA and EMA crossover signals a change in trend and can help understand price fluctuation.
Therefore, to run a bot we would write:
- Code that would import prices from the exchange
- Code that would communicate with the exchange
- The signal generator
- Rule that orders the bot to buy or sell (depending on the signals)
- Risk allocation algorithm
- API key requests that send the orders to an exchange
Will it really work?
Trading bots can be risky and challenging. Investing money and expecting the software to behave flawlessly is not always a good idea. In many cases, bots stopped performing as expected. This led to huge money loss and destroyed acquired profits. Just to name one example in the Bitcoin market, where a bot was trading 28000 Bitcoins daily, increasing market volume in 5 times.
However, there are a few case studies where trading bots really help:
- Repetitive tasks
- Portfolio rebalances
- High-accuracy trading (within milliseconds of time)
- Trading 24/7
- Smart order routing
- Multiple strategies at the same time
- Reduction of human error
Conclusion
A debate rages on the usefulness of trading bots. Though having an apparently prompting future, they are still pretty crude and prone to errors. Especially in the financial markets where mistakes are unacceptable. On the other hand, high-frequency trading on the stock markets is already controlled by advanced bots. If one market is conquered, it is just a matter of time when the cryptocurrency market is dominated by trading bots. Who knows, it might have already happened.
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
