Erik Weijers, 5 months ago

What are trading bots in crypto?

Trading bots are automated tools (programs) that execute trades and transactions for human investors. They range from basic dollar-cost-average automators to advanced setups that combine different trading signals. 

A bot lets you automatically execute a customized or existing, built-in trading strategy. Often, the goal is to generate a profit that beats the market. Duh. Of course you want to make more than if you just would have held the coins.

Most of the crypto trading these days is done by bots, at least measured by the amount of volume: close to 90%. But why?

First, because investors can simply not spend enough time to the cryptocurrency markets as necessary. That would require round-the-clock monitoring of crypto exchanges all over the world, risking a nap right at the time that your condition to buy or sell is met. Timing is everything, and a bot is ever vigilant. 

Second, a lot of the manual labor of trading is dumb execution, it's repetitive. Let a trading bot copy/paste specific tasks.

A crypto trading bot can have several forms: 

  • It can be a service you sign up for
  • It can be a built-in tool that a crypto exchange offers
  • You can program a bot yourself

Trading with a trading bot service

How does the process work? 

  1. Create an account at the crypto bot software service, via mobile or desktop app.
  2. Connect it to an exchange of your choice with an API key.
  3. Deposit crypto to the bot software.
  4. Choose a predefined bot or build one yourself: make the bot buy/sell on certain conditions.
  5. (optional): backtest the strategy to see how it would have performed in the past.
  6. Start the bot.

While using a trading bot service, be aware that you are exposed to counterparty risk. As with every third party, the mantra holds: not your keys, not your coins.

Making your own trading bot

If you're not the hardcore developer who codes his own bot in for example Python, you will use an interface of a trading bot service. So it might sound more daunting than it actually is to make your trading bot. 

Trading bot services provide templates that you can use as a starting point. For example: EMA cross and RSI. In other words, exponential moving average in combination with RSI. Or Bollinger bands. You can then come up with your own bot, for example: 

'Buy ETH if the 4-hour EMA crosses the 1 hour EMA AND if the RSI is lower than 70'

Popular trading bots/ strategies 

Bot trading has evolved into a wide variety of strategies. We list a few basic ones. 

Grid trading bot

A grid trading bot is about placing multiple orders above and below a set price, resulting in a 'grid'. For example, you can set buy orders at every $200 below the current market price of ETH and sell orders every $200 above ETH’s current price. Grid trading is sometimes used for prices that are in a sideways market. 

Rebalancing bot

Suppose you want to have 1000 dollars’ worth of BTC and ETH in equal amounts. The bot will allocate your position at a ratio of 1:1. That is, the bot will buy 50 units of BTC and ETH each according to the real-time prices of BTC and ETH. If the price of ETH rises in comparison to BTC, it will sell some of the ETH and convert it to BTC, until the 1:1 ratio is achieved again. 

Momentum trading bot

A very simple example of a momentum trading bot would be: buy the coin at certain time intervals when it is above the 200 day moving average. And sell everything when it dips below. 

Mean reversion bot

The mean reversion strategy is based on a simple assumption –  whenever the price of a coin moves away from its average, then it’s eventually going to revert back to it. Sell high, buy when it's back or under the trend. 

Arbitrage bots

These are specialized bots, dedicated to taking advantage of price differences across exchanges. Most arbitrage strategies use bots, as they do routine operations way faster.  

Backtesting a bot trading strategy 

Backtesting is the process of testing if a bot strategy would have worked across a certain time interval in the past. Crypto trading services often have backtesting tools. It's fun to tinker with your own bots, comparing how different settings would have performed in the past.

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