Understanding How Trading Bots Work
A trading bot is a software program that interacts directly with financial exchanges using Application Programming Interfaces (API) to determine whether to buy or sell a currency pair at a given point in time, depending on the interpretation of the market data.
The bots make these decisions by monitoring the market’s price movement and reacting according to a set of predefined and pre-programmed rules. Typically, a trading bot will analyze market actions, such as volume, orders, price, and time, bots can also be programmed to suit traders’ preferences
Table Of Contents
- 1 Understanding How Trading Bots Work
- 2 Common Strategies used by the trading bots
- 3 Top 6 Cryptocurrency Trading Bots
It should be noted that there is no such thing as a “holy grail” for trading systems. The most important thing to highlight when it comes to cryptocurrency trading bots is that they are not a one-stop passive income solution that will brings riches while in sleep. The bots that promise you that will, most likely turn out to be scams and will probably end you up losing you money.
Common Strategies used by the trading bots
The major media used by these bots include Browser plugins, OS clients, trading servers and cryptocurrency exchanges.
It should be noted that trading isn't only based on technical analysis alone, but also factors including the fundamental analysis. It's difficult for a computer program to react to fundamental market conditions such as rumors on social platforms, hack on exchange platforms, or the decisions of some governments on cryptocurrency. This means there is a little bit of work needed from the user’s end to tweak the software to suit the current situation, and thus require a little bit technical know-how from the end of the trader.
Since the cryptocurrency market is yet to be matured as other markets, there are still lots of arbitrage opportunities due to the inefficiency. There were often large differentials between prices offered on various exchanges, meaning, profits could be made through arbitrage. The bot can be pre-programmed to buy low in one place and sell high in another at the same moment in time, and this can be done several times when there is a big gap in trading volumes between different markets or exchanges.
Additionally, arbitrage can also be utilized by traders looking to involve futures contracts in their trading strategies by benefiting from any difference that exists between a future’s contract and its underlying asset, by considering future’s contracts that are traded on different exchanges.
A trading bot can also be programmed to simultaneously place both buy and sell orders in an attempt to profit from the bid-ask spread. The bot will be programmed to make both buy and sell limit orders near the existing marketplace. As prices fluctuate, the trading bot will automatically and continuously place limit orders in order to profit from the spread.
Since it is a fairly simple strategy there's a lot of free trading bots that one can download and configure to perform market making on a wide variety of exchanges.
The Ping Pong Trading Strategy
The Ping Pong trading strategy uses the Range Bars which makes it easy to calculate the entry and exit points. This strategy works best when it is clear that the market is moving sideways. Under these circumstances, profit is made by buying at the bottom of the troughs and selling at the crest of the charts.
A clear set of rules about the price range is in place such that as an order is executed, the exit order is immediately placed at a price predetermined by the profit range defined by the rules of the strategy, and a predetermined stop order is also a placed for unexpected movement of prices against the order.
Technical Analysis (TA) Tools
Other technical analysis (TA) tools often used include:
Exponential Moving Average (EMA)
Many bots are designed to work with the EMA. The EMAs track markets over a set of time and bots are programmed to react to that price’s change or act further when the price behaves in a certain way such as moving beyond certain thresholds.
Double Exponential Moving Average (DEMA)
Some bots were programmed to trade based on the measure of a security's trending average price that gives the most weight to recent price data. Bots programmed using DEMA are more reactive to price fluctuations than those designed with EMA, thereby bringing more value to short-term traders attempting to pinpoint trend changes.
Triple Exponential Moving Average (TEMA)
The TEMA is a composite of all the three mentioned averages. Bots designed with TEMA smooths price fluctuations and filters out volatility than any other.
Bollinger Bands are a technical indicator that has three lines. An upper, middle and lower. Day Trading Uptrends with Bollinger Bands Bollinger bands help assess how strongly an asset is rising, and when the asset is potentially losing strength or reversing. Day Trading Downtrends with Bollinger Bands help assess how strongly an asset is falling, and when the asset is potentially strengthening or reversing.
Ideal Bollinger Bands setting vary from market to market, and may even need to be altered over time even when trading the same instrument. Bots built with trading are much more efficient in capturing the Up & Down trends.
Top 6 Cryptocurrency Trading Bots
The cryptocurrency market is growing and evolving on a daily basis. Hence, trading strategies need to be updated and adjusted to function in new market conditions as well. The more sophisticated crypto trading bots allow traders to set specific parameters at which the bots execute trades on his behalf. These parameters need to be adjusted as you go along. It also needs to be noted that trading bots can easily turn out to be scams when due diligence is not made before making a selection.
The number of trading bots in the market is increasing on a daily basis. They range from free software that anyone can use to expensive subscription-based bots for professional crypto day traders. However, even the most popular cryptocurrency trading bots vary in quality, usability, and profitability. This is why we present you with the tested and trusted ones in the market.
The following are the few recommended ones while selecting a trading bot:
Additionally, Gekko has a number of plugins available that always keep traders updated. While its functionalities are somewhat limited compared to some of its peers, Gekko can be a good option for those new to the cryptocurrency markets who want to test out different automated trading strategies.
CryptoTrader [found at https://cryptotrader.org/] is a cloud-based trading bot that provides users with fully automated trading solutions which are hosted on the platform. The software supports multiple currencies and exchanges and allows users to buy their favorite trading strategy, or alternatively to sell strategies developed by themselves using the backtesting tools that allow users to review how their strategies would work under different market conditions.
CryptoTrader offers five different subscription plans, with fees ranging from 0.006 BTC to 0.087 BTC per month. The separate packages include a number of differences, including the number of bots operating on the user’s behalf as well as the maximum equity limit. Although some knowledge of coding is beneficial when setting up strategies in the CryptoTrader bot, there are a number of free and paid strategies available for users that are not experienced in coding.
ZenBot [found at http://zenbot.org/index.html] is another open-source cryptocurrency trading software. As an open-source project, Zenbot is freely available for users to download and modify the code as necessary. Zenbot supports multiple digital assets and uses a technical analysis-focused approach to execute trading strategies. It also offers high-frequency trade execution, extensive backtesting, and a paper trading function to test strategies in real-time.
Haasbot [found at https://www.haasonline.com/] trades Bitcoin and many other altcoins, it is probably the most popular crypto trading bot on the market today. The bot provides several customizable technical analysis tools users to develop advanced crypto trading strategies, and it is supported by major bitcoin exchanges.
Although Haasbot is probably the most complete of the trading bots that are currently available, doing much of the labor with relatively minimal input required from the user, in order to provide this service, it is pretty expensive, with costs ranging from between 0.028 to 0.08 BTC for a three-month period. The bot is recommended for advanced traders.
The Gunbot trading bot [found at https://www.gunbot.com/] has many inbuilt strategies including Bollinger Bands(BB), Gain, Step Gain and Ping Pong. The trading bot has three different price package plans currently ranging between 0.006 BTC and 0.129 BTC. depending on the trader’s ability. Like some other trading bots, Gunbot is also supported by many cryptocurrency exchanges including Bittrex, Kraken, Poloniex, and Cryptopia. It’s recommended that users of this bot pay attention to their trades since it’s configured to deal with large market volatility. In case of large volatility turn it off, and leave the order on the books.
Formerly known as leonArdo, Margin [found at http://marginsoftware.de/product.html] has been developed from the ground up as an object-oriented C++ application making it responsive and completely intuitive to use. It is built with the ping pong strategy that allows you set a static buy and sell price. Margin currently supports Bittrex, Binance, Poloniex, HitBTC, Bitstamp, BitFinex, Kraken, OKcoin and Huobi, and its developers are currently working towards supporting decentralized exchanges. It currently costs $129 for a lifetime license.
Some amazing properties of Margin include:
- In-built automatic trading strategies
- Unified and configurable interface to multiple exchanges
- Margin trading support
- Indicators: MACD, Bollinger bands, VWAP, EMA, SMA etc.
- Multiple operating systems support including Windows, OS X, and Linux