Trading bots for trading on a cryptocurrency exchange: what they are, how they work.

  • cryptocurrency
  • financialnews

With the help of trading robots, traders can switch their activities to automatic mode. But in order to get a stable profit, it is important to monitor market changes and take them into account to adjust the bot's algorithm.


What is a trading robot?

The term "trading robot" should be understood as a special program that connects to the terminal and independently performs the tasks needed by the trader. The value of such software is that it allows you to automate work with the market.

Such robots are often used not only by individual traders, but also by large organizations - trading companies, investment banks, funds and others.

There are two main types of bots that are used in trading:

  • A robot that gives signals. Such a program analyzes the market situation and gives recommendations for opening or closing a trading position. At the same time, the bot can indicate the recommended lot size and cash balance;
  • automatic bot. Such programs are completely autonomous, they independently (without the participation of a trader) open and close transactions in the market.

In both cases, robots analyze market data and make decisions based on it. In fact, this is a digital copy of the logic and actions of the trader himself.

If there is a stable and profitable strategy, a trader can order the creation of a trading robot from the developer. The program will include the necessary algorithms for working with the market and the ability to make changes independently. There are also many templates that allow you to create trading robots based on existing solutions.

Strategies of different levels of complexity can be automated. But do not try to find a universal option. Such programs often lose their effectiveness when the market situation changes. This is the reason why a trader should monitor the market on his own.  

How to use bots

Programs with algorithms prescribed in them can perform any trading tasks. This allows you to automate different styles of working with the market.

You can use bots in any terminal that has access to the API (application programming interface) of the exchange.

Not all robots are equally effective, and you need to be able to determine the quality of their trading or signals. This can be done using the backtesting method. Market data taken from the quote history of one or more assets is loaded into the program. In this way, a simulation of real trading is created.

Based on the information received, the bot should generate signals (or open deals), as well as skip inappropriate situations. Next, the decisions of the program need to be compared with historical changes in coin prices. At the same time, it is important to take into account time intervals: the robot needs to be tested on the same timeframes on which it will trade in real conditions.

You can use invented market situations that reflect real:

  • prolonged lateral movement;
  • market growth;
  • crisis in the segment of selected assets;
  • sharp fluctuations;
  • collapses of quotations;
  • market shark movements and others.

In order for an automated trading system to give a high level of efficiency, it is necessary to formalize it as much as possible. We are talking about clearly defined and well-defined rules for opening positions, as well as holding and closing them.

The more detailed the bot's algorithm is, the less likely it is that there will be blind spots in its trading. The absence of certain conditions for entering or exiting the market can lead to incorrect decisions of the program.

For a deeper dive into the topic of creating and using trading robots, it is worth studying the experience of traditional markets (stocks and Forex). A lot of materials have been published on the Internet with parsing the codes of trading systems. And they can be adapted to software solutions for the cryptocurrency market. 

Advantages and disadvantages of using bots

The main advantage of using robots is to remove the human factor from the trading process. A trader cannot trade stably for a long time due to physical and especially psychological fatigue. And the bot is able to work around the clock, and it is created just for this.

There are also a number of other reasons why robots are often used for trading:

  • The program can work with a large number of assets at the same time. A trader simply does not have time to analyze and make the right decision with a large set of assets.
  • Reaction speed. In scalping and day trading, it is important to react quickly to the appearance of a favorable market situation or a signal to exit the market. The bot does not need to click the mouse to open a position, the speed of its reactions is much higher than human. This means that with proper settings, the robot will be able to close more profitable trades per day than a live trader.
  • The bot is not affected by emotions. One of the main reasons for draining a deposit during trading is emotional actions. A trader may feel fear of loss, a desire to recoup or take even more profit after a series of successes. Each of these emotions leads to error and drainage. The robot in any situation acts strictly according to the algorithm.
  • Round-the-clock market scanning. The trader receives information that he could miss in those moments when he is out of the market.

There are also disadvantages to using trading bots:

  • A robot cannot make decisions on its own. In the conditions of a changed market situation, the program will continue to operate according to the outdated system. She will not be able to reconfigure herself. For this reason, the trader needs to change the bot's algorithms by adding new data. Without such a correction, its effectiveness will inevitably decrease, and it will begin to make losses.
  • There is no flexibility. Sometimes you need to take into account additional factors to make the right decision. If the necessary information is not in the automated algorithm, then the robot simply does not recognize favorable conditions.
  • Poor quality of the program. There are many variants of trading bots for sale on the web, but they do not guarantee profits, even despite the positive reviews. You can buy a robot and not earn anything. As a result, you either need to choose a quality product very carefully, or pay an experienced developer to create a bot for yourself.

Features of crypto trading bots

A protracted sideways movement is not typical of the cryptocurrency market — it is always highly volatile. Plus, digital assets are traded around the clock. This condition increases the stress level of investors, because when they wake up, they may find that the quotes of the purchased coins have changed a lot. Trading robots allow you to correct this disadvantage: they monitor the market 24/7.

In the cryptocurrency market, both bots that give signals to open a position and those that trade on their own are used. But there are two more types of less common programs that can make a profit:

  • Robots for statistical arbitrage. They analyze the market in order to find undervalued and overvalued coins. Noticing such assets, the program determines patterns in their behavior and fixes the correlation between repetitive price movements.
  • Arbitrage bots. Provide profit by buying cryptocurrency at a reduced price on one exchange and simultaneously selling the same coins at a higher rate on another platform. To conduct such exchanges, the bot constantly monitors quotes on the platforms that the trader has chosen.

The second option has a significant drawback - the more people use one arbitrage robot, the less profit it can bring. For this reason, it is difficult to find an effective bot.

Also, programs are divided into categories, depending on the ability to edit them:

  • Bots with a ready-made algorithm. The trader does not change anything, everything works as programmed by the developer.
  • Customizable bots. Basic algorithms are set here, while the investor can customize the procedure for working with the market.
  • Scripting bots. Such software is open source. It can be used as a basis for creating any trading algorithms. But the trader must be able to program robots on his own.

When choosing a cryptocurrency robot, you need to carefully check the reputation of the seller. Malware is often distributed on the network, which has the appearance of an effective trading program.

Also, do not look for a universal option. It is better to separately select bots for trading in a bear market and separately for a bullish movement. In this case, the chance of making a profit will be higher.

Source Binance Blog