Crypto trading bots are automated computer programs that buy and sell cryptocurrencies at the correct time. Their sole goal is to generate as much profit as they possibly can for their users. The way they do this is by continually monitoring the market and reacting according to a set of predetermined rules. As per your tastes and preferences, you can determine how the bot will analyze various market actions, such as volume, orders, price, and time.
Trading bots – A little background
Back in 1949, Richard Donchian came up with the concept of an automated trading system when he came up with a set of rules to buy and sell funds. Eventually, famous traders like John Henry began adopting the concept of “rule-based trading” in the 1980s. Since then, trading bots have been popular in the market in one form or another. However, these are usually pretty expensive and not available to average investors. The Bloomberg terminal can cost more than $10,000.
There are two main use-cases for trading bots. Firstly, investors can use bots to make the whole process a lot simpler and streamlined. The bots can take care of factors such as portfolio diversification, index construction, portfolio rebalancing, etc.
The second use-case is a lot more complicated and advanced. In this case, the bot will try to beat the market and consistently make profits. However, this approach requires a lot of research to be done beforehand.
However, the game has completely changed with cryptocurrency trading. The crypto market is open 24*7 and is highly volatile, which is why the need for bots is more prevalent than ever before. Since many people choose to trade Bitcoin passively and are unable to dedicate the time required for dynamic market analysis. As such, crypto trading bots will be beneficial for users to conduct efficient trading.
Building blocks of a Crypto trading bot
All trading bots usually have the following features in common:
- Strategy Implementation.
- Job scheduler.
Before you even make any trades with your bots, you must backtest it against historical market data. You must make sure that your backtest is as realistic as possible. You can do so by taking into consideration latency, slippage, trading fees.
You can collect high-quality market data by accessing exchange APIs. Libraries like CCXT can allow you to interface with a bunch of exchanges.
#2 Strategy Implementation
Predetermining the trading strategy that your bot will follow is critical. In this stage, you specify the logic and calculations that will help your bot to determine when and what to trade. After creating the strategy, you must backtest it to see how it performs. We will talk about the strategies that you can implement in a bit.
So, you have backtested your strategy?
The next step is to execute it in real-time. In this stage, the logic that you have hardcoded into the bot will be converted to API requests that the exchange can understand. Some bots may even have allowed you to simulate your strategy in real-time with fake money.
#4 Job Scheduler
Now that you hard-coded the strategies and tested them out in the real-world, its time to finally automate the entire process. You need to set-up a job scheduler to execute your trading strategies automatically.
When should you use Crypto trading bots?
We have touched on this point a little before, but there are a lot of functions that a well-executed bot can conduct for you like rebalancing, portfolio management, data collection, smart order routing, etc. So, when it comes to choosing and coding your bots, you must follow the basic rules of automation:
- Automation doesn’t mean completely hands-off. You still need to take care of the basics and do your due diligence.
- The big time-consuming tasks which are pretty repetitive and may involve unnecessary complications are the ones that you should automate.
So, what exactly can you improve with trading bots? Let’s take a look.
#1 Repetitive Tasks
Repetitive admin tasks consume a lot of time and effort. A trading bot will allow you to virtually “copy and paste” specific tasks to conduct trades with ease. One of the best ways where bots can help with repetition is in periodic rebalances. If you want to conduct hourly rebalances, then you’ll need to, as the name suggests, rebalance your portfolio every hour. So, you have two options:
- Set the alarm every hour to rebalance the portfolio and lose your sanity in the process.
- Create a trading bot and program it to rebalance your portfolio every hour till the end of time.
Timing and achieving a high degree of accuracy in your trading is extremely necessary for trading. Every single trade that you make can have an enormous impact on your potential earning. Let’s take an example. Suppose the price of Bitcoin is going down and you want to sell your position the moment BTC hits the $8,750 support line. If you were to do this manually, you’d have to patiently and carefully observe the price chart, and even then, you may not pull the trigger at the right time. The bot can be easily programmed to monitor the market and execute a trade at the correct times.
#3 Day trading can be a full-time job
We have a lot of daily responsibilities which may stop us from sitting in front of computer screens and monitor the price charts 24*7. Plus, imagine the headache if you actually have a well thought out and diversified portfolio! The amount of research you will have to do every single day may be impossible for you to do single-handedly. Plus, as we have mentioned before, the trading process has plenty of repetitive and cumbersome tasks. A trading bot can efficiently conduct these repetitive tasks throughout the day and make the process much simpler for you.
#4 The market never sleeps
As we have mentioned before, the cryptocurrency market never shuts down. There are literally thousands of exchanges around the world, providing their services 24*7. While this may sound amazing, the reality is that the price can change around the clock. Unfortunately, this means that to make sure that you are leveraging your funds in the best way possible, you will need to be awake all the time, carefully reading the price charts. Since that’s humanly impossible, you have two options in front of you:
- Not make the most profit possible since you will need some personal down-time.
- Use a trading bot to automate your strategies while you sleep.
#5 Complications can be simplified
Consider the example of “smart order routing.”
- The idea is to route trades through numerous trading pairs.
- Every single trading pair needs to be carefully determined as per its timing, asset quantity, and trading price.
- This entire route needs to be finished within a specific time-limit before the market conditions change.
It seems pretty easy-to-understand, right? However, the execution of this trade could be nearly impossible. This is just one of the many examples of the several complexities that should be factored in while training. Some strategies could be almost impossible to implement.
Trading bots could be used to automate these complex and seemingly impossible strategies with ease.
What strategy should I hard code into my bots?
Here are some strategies that you can hardcode into your bots. The content for this section has been sourced from this article.
#1 Mean Reversion
The mean reversion strategy is based on a straightforward assumption – if the price of a coin shift from its average, then it’s eventually going to revert back to it. This assumption holds true both for traditional and cryptocurrency markets. The reason why this happens is because of the overall market psychology. Imagine we have a cryptocurrency named “X,” which has an average price of $1.
- If the price of X goes up to $1.25, the traders will sell-off the asset in bulk, which will reduce the price to $1.
- Similarly, if the price drops to $0.75, the market will see this as a bottom and start accumulating as much as possible, bringing the price up to $1.
#2 Momentum Trading
A momentum investor judges the ebb and flow of the market by its momentum. An ideal scenario is to ride a positive momentum wave with your assets and then immediately sell them off when the market momentum reverses. The core philosophy behind this is the belief that the prices of an asset will spike above its average and then run out of momentum and fall down. In this situation, the timing of the buy-in and sell-off is critical.
The price of an asset can vary in different exchanges. This mainly happens due to fragmentation in price across marketplaces. Eg. X could be priced at $1.01 in Exchange A and $1.02 in Exchange B.
With the Arbitrage strategy, you will be able to make a profit by buying and selling on exchanges simultaneously. To exploit these price differences, you will need to buy and sell X, almost at the same time.
#4 Naïve Bayes
The Naïve Bayes trading algorithm uses machine learning to determine the probability of an event occurring. By feeding relevant information to your bots, you can help it determine the correct entry and exit times.
#5 Natural Language Processing (NLP)
In the cryptocurrency market, the price of the asset can change wildly as per fundamental news like articles, tweets, and other similar content. Using NLP programming, one can teach their bots how to programmatically interpret words and phrases and analyze the underlying sentiment. Eg. Partnership news is usually pretty bullish. So, if your bot can read an article which states, “X partners up with B to boost mainstream adoption,” it should start accumulating the asset.
Types of Cryptocurrency Trading Bots
The four main types of cryptocurrency trading bots are as follows:
- Arbitrage bots.
- Market making bots.
- Algorithmic trading bots.
- Technical trading bots.
- Profile automation bots.
#1 Arbitrage Bots
These are the bots hardcoded with the arbitrage strategy. Blackbird is one of the better arbitrage bots in the market.
The Blackbird Bitcoin Arbitrage is a C++ trading system that does long/short arbitrage between Bitcoin exchanges. While the code does require a little bit of work, it is free for use. Blackbird doesn’t precisely sell your Bitcoins, but it short sells them on the short exchange. The reason why it does so is because of the following:
- The strategy is market neutral.
- Using this strategy, one doesn’t need to transfer funds between Bitcoin exchanges. Buying and selling activities are done on two different exchanges parallelly and independently.
#2 Market Making Bots
Market making bots places several buy and sell orders to net in a quick profit. Eg. is X is trading for $1, your bot will create a buy order for $0.99 and a sell order for $1.01. If both the orders get filled, you will earn a profit of $0.02. HaasBot is one of the best market making bots out there.
This bot has been around since 2015 and is based out of Rotterdam. Here are some features of Haasbot to keep in mind:
- Boasts a wide variety of trading options – runs 10 HassBots in parallel, has access to 20 indicators, implements multiple trading strategies and is supported on all major exchanges.
- It has been designed for non-technical traders so its pretty beginner-friendly. You don’t need to tamper with its code.
- Since it runs on the cloud, there are no downloads necessary.
- There are three subscriptions available – 3, 6, and 12 months. The price ranges from 0.04 BTC for a 3-month Beginner license to 0.32 BTC for a 12-month Advanced license.
#3 Algorithmic trading bots
An algorithmic trading bot is a code-driven ‘program’ that can generate and execute buy and sell signals in the market. The main components of these bots include rules that signal when to buy or sell, and rules indicating when to close the position alongside rules determining order size and portfolio allocation. Trality is known as one of the best tools for creating these algo trading bots.
Trality is used by traders with different experience levels and skill sets to create bots and automate their trades with its intuitive and all-in-one, cloud-based ecosystem.
With the in-browser Python “Code Editor”, you can utilize its simple API and a list of technical analysis indicators to customize your bot. Furthermore, the prospect of trading beyond technical analysis indicators is what keeps the pros coming back to Trality. The real power lies in the ability to use math, statistics, and other sources of data to take your bot to the moon and back. You can automate any advanced trading ideas with this tool all under one roof.
For starters who can not code, Trality has another product, the ‘Rule Builder.’ This allows anyone to create and automate their strategies without writing a line of code. This is achieved through a drag-and-drop interface in which you simply place and combine technical analysis indicators and pre-defined strategies into a box to ‘build’ your bot.
- Tools for pros and beginners
- A cloud-based platform, so your algorithms run 24/7
- Fast and reliable backtesting module
- Flexible pricing model
- Supports all the major exchanges
- Rich documentation
#4 Portfolio Automation Bots
These bots will focus on helping their users to create, obtain, and maintain their desired portfolio, instead of active trading. The reason why users use these bots is to automate as much of the boring, repetitive tasks as possible. HoldBot is an example of a brilliant portfolio automation bot.
Hodlbot maintains an index that consists of the top 20 coins by square root market cap. When the price fluctuates, the HodlBot automatically rebalances your portfolio by selling out-performing assets instead of purchasing under-performing ones. Here are some features about Hodlbot to keep in mind:
- It doesn’t require you to put in any additional code.
- It has a 7-day free trial and then paid subscriptions start at $3/month.
- Advanced portfolio customization options with automated rebalancing and customizable time intervals
- Has well-researched market indices and backtesting tool.
#5 Technical Trading Bots
The conservative trader’s best friend, technical trading bots are some of the most popular and widely-used bots on the market. These bots use indicators and signals to predict future price movements and use them to make a profit. 3Commasis one of the more widely-used technical trading bots.
- 3Commas has a web-based interface that doesn’t require you to download anything.
- It doesn’t need you to tamper with the backend code.
- It has two subscription levels – Basic and Pro. The basic level costs $25/month, while the latter costs $84/month and has a lot more features.
- It can implement multiple strategies based on technical indicators.
- Is supported on most of the popular exchanges.
#6 Automated Crypto Trading
Bitsgap is best known for its unique automated trading bots. Thousands of traders with different experience and skill sets are using Bitsgap on a daily basis to maximize returns by automating their trading.
The algorithm implemented by Bitsgap is based on a simple and effective technique, called GRID. It distributes investment proportionally within a trading range predefined by a trader. Each time the buy limit order is filled, a new sell order is placed by the bot right above that price. And vice versa, a new buy order is placed below any filled sell order. As long as the price stays within the borders of the trading range, the bot will be trading non-stop.
Bitsgap algorithm is designed to maximize profit from buying low and selling high each time the price swings. Automated bots have all the risk-control features like Stop-loss, Trailing UP, Take profit, and several exit strategies.
Check this video to learn how does the Bitsgap crypto trading bot work:
- A cloud-based solution, so you don’t need to download anything
- Trading bots are based on a transparent and efficient logic
- Risk-free trading simulator in DEMO mode
- Backtested Strategies for a quick bot start
- 14-Day Free Trial
#7 Pre-programmed bots
Some platforms provide bots that have all the programming done for you. All you need to do is basically tell it where to trade and how much. You can also set additional parameters such as how long to run for and when to take profit or stop losses.
CryptX Terminal provides one of the largest selections of pre-programmed bots on an easy-to-use platform and at a very affordable price. CryptX offers a variety of different portfolio management and trading strategy bots, including arbitrage and signal trading bots such as Bollinger Bands, MACD, OBV, and RSI. You can connect to your accounts on the 10 most popular exchanges via API key and then launch your bots. They also provide backtesting data so you can see how a bot would have performed on historical data.
A free account gives you access to one running bot at a time on up to 2 exchanges with one backtest per day. The paid plans allow you to connect to all supported exchanges and run up to 10 bots with 10 backtests per day ($37/month) or an unlimited number of bots and 1000 backtests per day ($74/month). Other benefits include:
- Web-based interface that runs in any modern browser
- No coding knowledge is necessary
- 30-day free professional plan trial
How do I pick the best crypto trading bot?
Here are some questions that you must ask when choosing a trading bot:
Question #1: How credible is the team?
If you are going to trust a bot with your portfolio, then the least you can do is to make sure that the team behind it is as credible and qualified as possible. This can be done with a simple checklist:
- What is the work experience level of the team members?
- What are their qualifications?
- Have they ever maintained and grown a respectable portfolio?
- How well is the functionality of the bot documented?
- Where are they getting their funds from?
Make sure that the team is as transparent as possible about their development. This way, they can be held accountable for their actions.
Question #2: Is the bot actually using the strategy that I want to implement?
Knowing which bot best aligns with your chosen strategy is absolutely critical. This is why you should look over the bot’s website and read the different reviews and guides that people have written about it. On that note, you also need to know how hands-on you need to be with the bot’s configuration. If you aren’t that technologically inclined, then it won’t make any sense for you to subscribe to a bot that requires its users to be more hands-on.
Question #3: How strong is the support provided by the team?
The next thing you need to look into is the level of support provided by the team. Can you easily approach the team with questions regarding general support or bugs? Once again, there is a checklist that you can tick off beforehand:
- Does the company have an active community? This community will usually exist on a platform like Telegram, Discord, or Reddit.
- Within these communities, is the team actively communicating with the community?
- Are the developers providing timely updates and solutions to any possible bugs?
Question #4: How expensive is it?
As we have mentioned in the example above, the bot’s price can range from $0 to as much as $1000/month. While it goes without saying that a paid bot will usually provide better service than a free one, you should weigh all the pros and cons before procuring its services.
Question #5: Can it adjust according to different market conditions?
Every bot will execute a strategy in its own unique way. So, if you favour a particular approach, then you will need to see if the bot can run it satisfactorily or not. You don’t want to lose out on potential investment due to poor strategy execution.
Question #6: Finally. Is it easy to use?
Even though they can be really helpful, the reality is that most trading bots can be incredibly complicated. For a beginner, diving deep into the backend can be a nightmare. This is why make sure that you are choosing a bot that aligns with your level of expertise. If you are just starting out, it may be wise to select a bot which may not have a lot of fancy features, but is easy-to-use.
Crypto Trading Bots – Conclusion
So, there you have it. Cryptocurrency trading bots can be very helpful in letting you generate a profit from your investment. Also, it can take a lot of the stress, repetition, and boredom you would have had to face if you were to do everything manually from scratch. However, as we have seen in the guide, these bots don’t follow a “one-size-fits-all” approach. You need to carefully study them and zero-in on a bot that fulfills all your requirements.