Time waits for no one and financial markets are no different, especially when it comes to the unpredictable world of cryptocurrency trading, which is why a carefully calibrated, safe and reliable trading strategy is essential. Unlike traditional stock markets, cryptocurrency trading never stops, making it virtually impossible for private traders to track market fluctuations, diversify risk, reduce error and ensure trading discipline 24 hours a day, 7 days a week, 365 days a year.
Unless, of course, you have some help, which is where crypto trading bots come into play.
What is a trading bot?
A bot is simply an automated program that operates on the Internet and performs repetitive tasks more efficiently than humans. In fact, some estimates suggest that around half of internet traffic is made up of bots that interact with web pages and users, scan for content, and perform other tasks.
Crypto trading bots operate under the same basic principle. They’re software programs that execute functions using artificial intelligence based on pre-established parameters. No more missed trades or missed opportunities - by running a set of algorithms, you can automatically buy, sell or hold assets in a timely, efficient and automated manner day or night from anywhere in the world.
How do crypto trading bots actually work?
By communicating directly with crypto exchanges and placing orders automatically based on your own preset conditions, trading bots offer exceptional speed and efficiency, fewer errors and emotionless trading. In order to trade on an exchange, you must authorize a trading bot to access your account via API keys (Application Program Interface), and access can be granted or withdrawn at any time.
Trading bots work in three essential stages: signal generator, risk allocation and execution.
- The signal generator essentially does the work of the trader, making predictions and identifying possible trades based on market data and technical analysis indicators.
- As the phrase implies, risk allocation is where the bot distributes risk according to a specific set of parameters and rules set by the trader, which typically includes how and to what extent capital is allocated when trading.
- It’s go time. Execution is the stage in which cryptocurrencies are actually bought and sold based on the signals generated by the pre-configured trading system. In this stage, the signals will be converted into API key requests that the crypto exchange can understand and process.
How you can benefit from crypto trading bots
Why should you care about automated trading bots? Two words: Wall Street. Many reports suggest that around 80% of trading on the stock market is done via algorithmic-based automated programs. Comparatively few private traders, however, make use of algorithmic trading, partially due to the perceived complexity and costs. Not everyone is an experienced Python coder or financial expert, but trading bot platforms such as Trality are doing a really good job at leveling the playing field and giving retail traders, both beginners and advanced, a leg up across crypto markets.
You’ll often read that more than 80% of private traders lose money due to a variety of factors. Trading volatile cryptocurrencies is emotional work and with emotions come errors in judgement. As much as 39% of manual trades are influenced by our emotional states, which can cause us to make irrational decisions. It’s simple human psychology.
Choose instead to be among the 20% of smart traders who make money by harnessing the power of trading bots to ensure a non-emotional, systematic approach to trading.
Higher trading speed
Time is money. And when it comes to speed, bots are simply faster: millions of computations and thousands of transactions across various time zones and markets almost instantaneously. Trades happen in a fraction of second – far faster than anything an individual trader can accomplish.
In the time it takes you to read this sentence, a trading bot could have made multiple profitable trades for you.
Backtesting and paper trading
Pilots learn to fly with flight simulators, and traders should be using market simulators when learning to trade for the exact same reasons. We learn by doing, but we don’t want to lose money (or crash an expensive plane) in the process. Even experienced traders can reap the benefits of trading simulators.
With trading bots, backtesting and paper trading allow you to harness the power of historical data to simulate the viability of a particular trading strategy or pricing model. The point is not to predict the future (after all, we’d all be rich by now), but to determine how well (or poorly) a particular trading strategy is likely to perform based on historical data. Armed with a reliable backtesting tool and an accurate set of data, you can explore new strategies, add expertise and build confidence before you’re ready to put your money on the line.
If you’re looking for a get-rich scheme, then you’re better off heading to Vegas.
Trading bots are about minimizing risk by not putting all of your eggs in one basket. We all know that cryptocurrency markets can be highly volatile, which is why a prudent trading strategy should include risk diversification. One way to diversify your risk is to run multiple trading bots. And while a diversified portfolio is certainly not foolproof, it can balance risk and reward in order to reduce exposure to any one particular asset. Age-old advice that still rings true with cutting-edge technology like trading bots.
Consistent trading discipline
Learning a language, finishing a marathon, becoming a Zen master. They all require one thing: discipline. And trading is no different.
But discipline is difficult (how many Zen masters do you know?). By automating the trading process, however, bots ensure consistent trading discipline even in volatile markets when fear can lead you to sell or luck can cause you to buy. Because of pre-established trading rules, bots optimize long-term performance without the short-term costs of emotional human interventions.
Do crypto trading bots really work?
In a word: Yes!
Just consider the fact that Wall Street firms have been using algorithmic trading for years. In fact, within the past decade, algorithmic trading bots has overtaken the entire financial industry, with algorithms now responsible for most of the trading activity on Wall Street.
The question, then, isn’t whether they work, but rather how well they work. And their effectiveness largely depends on a number of factors, including the platform and bots that you choose as well as your levels of expertise and experience.
Crypto trading bots aren’t an instant path to success, though. They’re automated, but not automatic. In order to trade profitably, traders must understand that the process of creating a good bot takes clear goals, patience, and knowledge as well as a certain degree of trust, which is why it’s crucial to avoid one-size-fits-all bots from unknown sources.
Create your first (or next) trading bot with Trality
Whether you’re a casual trader, python guru or an absolute beginner, Trality offers the most comprehensive array of user-friendly tools to help you achieve your trading automation goals. With our easy-to-use UI/UX you can create, backtest and trade like a professional.
Rather than ready-made bots, Trality provides a platform for bespoke bot creation, with easy access for everyone. We even offer a simple step-by-step guide to bot creation later in this article. If you’re unsure about your coding skills, simply use our handy Rule Builder to create flexible bots using boolean logic (no coding is required).
Its graphical user interface lets you build your trading bot’s logic by simply dragging and dropping indicators and strategies. You can also choose from a variety of predefined strategies that you can customize to your liking right away. If you need any additional information or explanations, then check out Trality Docs, where we explain everything in plain English.
For more advanced users, Trality is proud to offer the world’s first browser-based Python Bot Code Editor, which comes with a state-of-the-art Python API, numerous packages, a debugger and end-to-end encryption. Additional benefits include accessing financial data with our easy-to-use API as well as access to a full range of technical analysis indicators.
Once you’re satisfied with your strategy and backtesting results, you can deploy your bot for live-trading or paper-trading on some of the most trusted exchanges, including Binance, Bitpanda, Coinbase Pro and Kraken.
The safety of your funds is paramount to us. We are committed to safeguarding your investments, which is why Trality never touches your funds directly. Bots merely send trading signals to your trusted exchange. Withdrawal-enabled API keys will always be rejected. All crypto bots and algorithms are completely sandboxed and are stored encrypted. And since our service is cloud-based, there’s never any need for additional installations. Create, backtest and deploy your crypto bot in one streamlined interface.
We’ve put together a step-by-step guide below in which we cover all the steps needed to create a bot and deploy it for live or paper trading.
Let’s get started.
Step 1. Register for free
Visit our website, enter your e-mail address, choose a password, click on the confirmation link we send you and you’re all set.
Step 2. Create a new bot
From the dashboard, click ‘Create new bot’. A box will pop up asking for some additional info.
You are about to become the proud owner of a brand new crypto trading bot. It’s time to pick a name.
Select ‘Rule’ as the bot type. The Trality Rule Builder is a drag-and-drop interface that allows you to create trading strategies, backtest them on historical data and fine-tune those strategies until they are profitable.
This is where you decide on your preferred exchange where your bot will run. With Trality, you can trade on the world’s leading crypto exchanges, including Binance, Bitpanda, Kraken and Coinbase Pro, but our list of exchanges is constantly expanding.
The last step is to select the ‘Quoted asset,’ which is the currency against which all trades will be executed. For our example, we’ll use Bitcoin [BTC].
You can even theme your bot with your favorite color to help you differentiate between bots.
Step 3. Select your assets
This is where you tell your bot what it should buy or sell. In the ‘Assets’ tab of your bot setup, you can select from a list of available base assets. Only assets that are available on your selected exchange will show up in this list. To keep it simple, we’ll select Ethereum [ETH] so our bot will trade ETH/BTC.
Step 4. Choose your parameters and fine-tune the settings
The Settings tab is the ‘fine details.’ Here you will tell your bot how much of your portfolio it can actually use to trade, how much or little it can buy or sell. You can define how long an order stays open before it is canceled or the time between making orders, which is known as ‘cooldown.’
For a detailed description of all parameters and settings, have a look at our Rule Builder section.
Step 5. Choose your strategy
Selecting the strategy is at the core of building your cryptocurrency trading bot. It is by far the most important step and, as such, something to which you should give very careful consideration.
Start by clicking the ‘Strategy’ tab and proceed to ‘Add new.’
Here, you can select from a long list of technical analysis indicators and pre-defined strategies that you can combine to make the perfect crypto bot. We know that some of the terminology might appear a bit daunting at first for beginners, which is why we’ve put together a handy strategy guide that describes in detail what each and every one of the strategies actually does.
You must then decide whether this will be a ‘buy’ or ‘sell’ strategy (you’ll likely want a strategy for both).
At this point, you could go one step further by clicking the ‘Expert’ switch. This allows users to get into the nuts and bolts of the strategy, making it your own by allowing you to tailor different specifics within the strategy (e.g. the interval, signal type, indicator parameters and keeping a signal). It’s not obligatory to do this, but if you don’t flick the ‘Expert’ switch, then the strategy you have chosen will simply use the defaults.
Some strategies are more complex, whilst others are far simpler (such as the Relative Strength Index), so please do pay careful consideration when choosing the right strategy based on your individual goals.
Step 6. Time to backtest
Backtesting is at the heart of every bot creation iteration. This is a crucial step before sending your bot onto a cryptocurrency exchange. As we read above, it’s an important step used for testing the efficacy of your bot’s performance. And because of our in-browser implementation, backtesting is quick and easy to use, with options for various scenarios and multiple time frames. And your backtesting history is recorded, allowing you to switch back to previous settings.
A good place to start backtesting is simply running your bot against the past six months or one year. After the backtest has been completed, you will get the results, which include all of the important information you need to understand if the crypto bot is doing its job properly (e.g. total return, maximum drawdown, number of trades executed, etc.).
If the results are not quite what you expected or if the bot is not acting in a way that yields profit, then you might want to adjust your strategies or add new strategies that compliment your pre-existing ones.
Step 7. Start your bot
The very last step is to launch your bot for live-trading or paper-trading on your chosen exchange. Click on the cloud button on the top right of the interface and follow the instructions in the dialogue box.
Congratulations! You’ve braved the waters of creating a custom crypto trading bot from scratch.
More importantly, you’ve added a crucial tool to your trading toolbox.
Creating the best crypto trading bots
Now that you’re familiar with trading bots and how to create one using Trality, we’d like to highlight some of the best practices for creating successful crypto trading bots. Stefan Haring, Director Risk & Portfolio Analytics, has written an informative blog series for us about the conceptualization, development and implementation of a multi-coin trading bot start to finish. It’s an excellent resource for understanding the various moving parts of trading bots, and below are some key takeaways.
Backtesting is the backbone of any successful trading strategy/system
We cannot stress this enough: backtesting is absolutely crucial. You’ll likely learn more from one hour of backtesting than from one year of live trading.
As Stefan Haring writes, ‘When running a backtest, it is particularly important to split the time period that is available for backtesting into in-sample and out-of-sample data. We use the in-sample data to optimise our strategy and, once we are satisfied, we use the out-of-sample data to validate our results and make sure that we do not just end up with an overfitted strategy that will likely perform poorly in actual live trading.’
Past results are not indicators of future performance
Let’s say that your bot has performed exceptionally well during backtesting. That still does not guarantee that it will continue to perform well after it has been deployed live. You should monitor its performance very closely in order to ensure that the bot continues to perform as expected. There is always room for improvement, from tweaking parameter settings to fine-tuning your original strategy.
Diversification is key
Remember what we said above about diversification? Rather than a sink or swim approach to trading, you should aim for smooth sailing (at least as smooth as possible given cryptocurrency volatility).
According to Stefan Harring, ‘It is of no use if we have 20 different coins in our universe but they all produce the same signals. In that case, the most optimal solution would be to trade only one coin. What we want is that our individual signals display a low correlation, providing us with a diversified return profile and a smoother, more consistent equity curve.’
Makes perfect sense to us and it should make sense to you, too.
Choosing the right trading strategy
With more people beginning to trade crypto, there are now more ways to make (or lose) your hard-earned money, which is just one reason why trading strategies are so important.
In order to achieve your trading goals, you need a clearly-defined roadmap. A well-planned trading strategy can get you to your destination faster and safer than an ad hoc approach. Let’s take a brief look at a few strategies to consider and what to avoid.
Swing trading involves trying to profit from price fluctuations that occur over a short or medium term such as a few days or weeks. Given the inherent volatility of cryptocurrencies, the use of swing trading bots has proven to be an attractive, though difficult to master, strategy for many traders.
Swing trading generally includes technical analysis (studying statistical trends involving price and volume) and fundamental analysis (determining whether an asset is over- or under-valued) as well as a sound understanding of risk/reward ratio when considering when to enter and exit a trade (i.e. stop loss and profit targets).
Swing traders make use of technical indicators, which are either leading or lagging. Examples of momentum indicators include Relative Strength Index (RSI), Stochastic Oscillator, and On-balance volume (OBV), while Moving Average Convergence Divergence (MACD) and Bollinger Bands (BB) are good examples of a trend indicator and volume indicator, respectively.
For more information about swing trading, take a look at our in-depth article “Best indicators for swing trading.”
Unlike swing trading, day trading involves the buying and selling of assets on the same day. The keyword here is volatility, which can be a double-edged sword. Play your cards right and you stand to make a bundle via day trading, but you can easily lose your shirt with just a few missteps.
Day trading bots can simplify your trading life by relieving some of the need and stress of sitting in front of a computer throughout the day. And since bot trading is emotionless, it can also mitigate some of our psychological handicaps, such as FOMO or fear of missing out.
Since day traders attempt to profit from volatility, the focus is on volume and liquidity, which is why technical analysis prevails (e.g. indentifying entry and exit points for trades). Day traders will also make use of chart patterns and technical indicators. To determine whether or not day trading is worthwhile for you, check out our post “Is day trading crypto worth it?”
While day trading is one specific trading strategy, there are a number of subtypes, one of which is scalping. A popular short-term trading strategy, traders who use scalping attempt to profit from small price movements, which can yield significant returns.
Unlike swing traders, scalpers look to exploit short-term volatility as opposed to larger price fluctuations, which necessarily requires a thorough understanding of market mechanics as well as quick thinking and even quicker decision-making skills. Scalpers generally trade in lower time frames, with intraday charts that vary between 1-hour, 15-minute, 5-minute, or even the 1-minute.
Buy and hold
Although not considered a real strategy, “buy and hold” deserves mention as it can be a passive approach used by many traders. As its name suggests, traders simply buy large amounts of a given asset and hold it for a long period of time.
If you buy to hold, then you’re not really benefiting from the power of algorithmic trading, as you are not actively trading. Entry price points, technical indicators, and timing become largely irrelevant. You’re merely sitting on an asset in the hope that it appreciates over an extended period of time.
Upgrade your trading with Trality
Quite simply, we believe that every single trader should benefit from the advantages of automated crypto trading bots.
Trality brings automated trading from the complex and expensive terminals on Wall Street directly to your laptop, phone or tablet and we’re doing it in a way that works for both beginners and experts alike.
Trality offers 4 different packages differentiated by trading volume, number of bots, tick interval and log retention.
- The Pawn plan is free and comes with 1 live bot, 1 virtual bot and a monthly volume limit of €5,000.
- The Knight plan is €9.99 and comes with a monthly trading volume limit of 25.000€. Users can run 2 live bots and 2 virtual bots with this plan.
- The Rook plan costs €39.99 and it’s the next upgrade if monthly trading volume exceeds €25,000 or if you want to run more than 2 live bots and/or 2 virtual bots. This plan comes with a monthly trading volume limit of €250,000 and it's meant for those who are actively trading crypto.
- The Queen plan is €59.99 and comes with unlimited monthly trading volume.
All Trality plans come with a 20% discount for yearly subscriptions. Check the Trality pricing page for more details.
Whether you’re all set to take the plunge or still on the fence, don’t be a stranger. We encourage you to explore the state-of-the-art tools on our website for free and see for yourself how easy it is to create, backtest and start your own trading bot.Start creating
Disclaimer: Backtests are not indicative of future results. The above article is merely an opinion piece and does not represent any kind of trading advice or suggestions on how to invest, how to trade or in which assets to invest in or suggestions on how trading bots or trading algorithms can or should be used! Always do your own research before investing and always (!) only invest what you can afford to lose!
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