The Ultimate Guide to Crypto Trading Bots
Last Updated: 1st November 2018
One aspect that the cryptocurrency space is well known for is the volatility in the market. Cryptocurrencies such as Bitcoin and Ethereum can rise by 20%, and just as easily see a decrease by 30% in the span of a few hours. However, this market volatility is ultimately very positive if you are an active trader in the market, because volatility drives profit. Traders can utilize a variety of tools to navigate the market successfully, such as technical analysis and fundamental analysis. Included in this, are crypto trading bots, which are increasingly playing a key role in the average trader’s tool kit.
Crypto Trading Bots
One important thing to note is that trading bots have been very popular and widely used in the traditional financial markets. However, they were never an option for the average investor given that they are typically not permitted direct market access (DMA). While trade execution by the average investor in traditional markets is done immediately, the transaction is actually fulfilled by an intermediary brokerage firm that possesses DMA. DMA is a term that is used in the financial markets to describe the ability to place buy and sell orders directly on an exchange’s order book. Normally, directly trading on the order books within the traditional financial markets is restricted to broker-dealers and market making firms. However, given the values of transparency upon which much of the cryptocurrency community is built upon, cryptocurrency exchanges have tended to grant their traders with DMA.
DMA comes with numerous advantages, including:
1. Level playing field: Orders made are of equal status on the order book, prioritized only in terms of price and time.
2. Visibility: Orders that are executed are visible to the entire market, allowing all market participants full contribution to central market liquidity.
3. Depth of order book: Greater clarity as information regarding the number of buyers versus the number of sellers, and at what price they are willing to trade, is easily accessible.
4. Set your own price: Increased control over limit orders, as they can be entered at whatever price you choose and will be available to the entire market.
5. Tighter spreads: Because limit orders are displayed publicly rather than held privately, market spreads become tighter, which benefits the order placer, who now has a higher chance of executing at the price that they want. Moreover, the market as a whole is working with a tighter public reference point from which to work with.
6. Certainty: The order book is always available.
The cryptocurrency market differs from traditional markets i.e. the stock market, in that it is open 24/7. As an active trader, this can be a double-edged sword. On one hand, a market that is continuously open means that there might be more opportunities on which one can capitalize. On the other hand, humans need sleep, and the market can just as easily fall rapidly during this time of rest. As a result, crypto trading bots are increasingly becoming popular amongst traders that want to remain in control of their trading activities at all times.
A trading bot is effectively a software program that interacts directly with a financial exchange by means of an application programming interface (API). An API can be thought of as a software intermediary that allows two applications to communicate with each other. For example, when you use an application on your mobile device e.g. check the weather, the weather application connects to the internet and transmits data to a server. The server then retrieves that data, interprets it, and sends it back to your mobile device. The weather application then interprets that data and presents it in a manner that can be easily understood by the device owner. A similar process occurs between a trading bot software program and an exchange. By being able to access exchange data, trading bots can place buy or sell orders on a trader’s behalf, depending on how market data has been interpreted. Market data can include: price movement, volume, time and much more. Crypto trading bots are generally very customizable, allowing a trader to program a trading bot in accordance with their preferences.
Crypto Trading Bots: Market Strategies
Traders can make use of crypto trading bots to implement a variety of market strategies, including:
1. Arbitrage: This strategy is best understood as a trader taking advantage of the price differential that can exist between two markets, or in this case between cryptocurrency exchanges. With arbitrage, a trader would purchase a digital asset in one exchange, and simultaneously sell it on another exchange. Arbitrage was an effective strategy during the earlier days of the market, as there were often large price differentials on varying exchanges. However, the spreads found with this strategy have tightened up as the market matures.
2. Market Making: Trading bots are also useful for the market making strategy, which involves the continuous buying and selling on a variety of spot digital currencies and digital derivatives contracts, all done in an effort to capture the spread between the buy and sell price. In other words, market making involves the placing of limit orders around the current market price of a digital asset, on both sides of the order book (so the buy and sell orders). With time, as the price of the digital asset fluctuates, the trader can profit from that resulting spread.
3. Trend Trading: Crypto trading bots can also be programmed to identify trends of a digital asset, and execute buy and sell orders based on them, which makes them especially effective for trend trading. Trend trading is a strategy that tries to capture gains through the analysis of an asset’s momentum in a given direction. To put it simply, trend traders will enter into a long position when an asset’s momentum is trending upward, and enter into a short position when it is trending downward.
4. Mean Reversion: This trading strategy functions on the assumption that there is an underlying stable trend in the price of any given asset. It presumes that, whilst the price of the asset can fluctuate around this trend, it will eventually revert toward its mean or average. This mean or average could be the historical average of the price or return of the asset. This can form part of a trading strategy in that a trader can execute buy or sell orders on the presumption that the price of a given asset will revert back to its mean or average.
Benefits of Using Crypto Trading Bots
If used correctly, using a crypto trading bot can result in numerous advantages for a trader, including:
1. 24/7 Market: Given the fact that the crypto market is a 24/7 global market, crypto trading bots can be extremely useful in reacting to any market developments when a trader is away from their trading platform.
2. Lowering human error: Trading bots can mitigate human error by transferring the responsibility of trade execution to an automated software program.
3. Shifting market: Market shifts can often happen quickly and unexpectedly, crypto trading bots process information much faster than the average trader, and as such, are well placed to respond accordingly to any sudden shifts in the market.
4. Emotional trading: Crypto trading bots also eliminate ‘emotional trading’. By keeping emotions in check, traders may have an easier time sticking to their trading strategies, as trade orders are automatically executed as soon as certain parameters have been fulfilled. Traders will not be able to hesitate or question a trade.
5. Backtesting: Crypto trading bots also open up the opportunity for a trader to perform backtesting. Backtesting is the act of testing a trading strategy on historical data to determine the viability of the strategy before the trader decides to risk any capital. Backtesting allows the trader to effectively simulate a trading strategy over a set period of time and then analyse the results to determine the profitability and risk of the strategy. Backtesting that is performed correctly will also allow a trader to fine-tune their trading strategy.
6. Diversification: Making use of crypto trading bots also introduces diversity in trading. These bots can allow an individual to trade numerous accounts or various trading strategies. This could potential have the effect of spreading risk over various digital assets whilst also creating a hedge against any losing positions.
7. Discipline: Discipline is a fundamental skill that is required when it comes to trading. Discipline in trading is often lost because emotions takeover, which then leads to irrational trades being made. A lack of trading discipline can also stem from wanting to squeeze out extra profit from a trade, or the desire to avoid a loss. Crypto trading bots can help to preserve a trader’s discipline because with automated trading, any trading strategy that has been laid out, is executed with maximum precision.
Limitations of Using Crypto Trading Bots
Despite the benefits that can be gleaned from crypto trading bots, they are not without their limitations:
1. Monitoring: Although trading bots can in theory be left alone to carry out a pre-engineered trading strategy, it is still a good idea to monitor the progress of the bot. This is because a whole host of issues can occur with bot trading, including: connectivity issues, power loses or computer failures. Moreover, market anomalies could result in incorrect trades being made, such as not making a trade, or making duplicate trades. Monitoring the trading bot ensures that any problems that arise can quickly be identified and resolved.
2. Trading Strategy: The effectiveness of a crypto trading bot is dependent on the implementation of a solid trading strategy. By using a sub-optimal trading strategy, a trading bot could easily end up automating a set of poor marketing trading decisions.
3. Trading Bot: Not all crypto trading bots are equal. A trading bot with poor functionality and codebase will produce subpar trading results. So, one should ensure that they choose trading bots that are reputable and possess longevity in the market.
4. Scams: There are numerous trading bots that are out there, and unfortunately, some bots can easily turn out to be scams. Being diligent and conducting plenty of research into a trading bot before purchase is a good way to guard against scam crypto trading bots.
5. Flash Crashes: These types of crashes occur when there is a rapid decline in the price of a digital asset. We have seen examples of a flash crash in the cryptocurrency market, with a notable one being Ether on GDAX back in June of 2017. Flash crashes can pose a serious risk to traders that allow their bots to execute all trades on their behalf. Setting appropriate stop loss limits can help to mitigate this risk.
Crypto Trading Bots in the Market
There currently exists numerous crypto trading bots on the market. These bots all differ significantly from each other with respect to: functionality, quality, profitability and usability. In the following section we take a look at some of the more popular crypto trading bots that are currently operating in the market.
CryptoTrader is a cloud-based trading platform that give users full control to develop their own crypto bot which can be hosted on their platform. CryptoTrader supports a variety of digital assets and exchanges, and allows traders to backtest their trading strategies. The platform even houses a marketplace in which traders can sell trading strategies that they have developed, as well as buying trading strategies from other traders on the platform.
CryptoTrader offers five subscription plans that individuals can choose from, ranging from: Basic to Premium. Each subscription plan includes varying benefits, from the number of bots that can be used, to the maximum equity limit that is imposed by the platform. CryptoTrader also features an email and text notification service, which can alert users to any urgent changes or events that occur in the market.
Gekko is a an open-source trading bot platform that supports a wide variety of Bitcoin exchanges. Gekko is entirely free and is easily accessible on GitHub. With the bot, users can execute basic trading strategies, and Gekko generally serves as a good introduction to trading the cryptocurrency market using bots. Gekko also aggregates live price data, calculates indicators, executes live orders, calculates profit and risk metrics, and also allows for backtesting in order to trial run various trading strategies.
Haasbot is one of the more popular crypto trading bots that is available in the market. Haasbot provides functionalities such as: automated trading, historical and real-time backtesting, and notification and reporting capabilities. Haasbot also supports numerous exchanges, and trades a variety of digital assets other than Bitcoin. Haasbot offers three subscription plans that are geared toward traders in the following categories: beginner, advanced and simple.
Cryptohopper is a 24/7 cloud-based trading bot that allows the bot to continue trading even if the trader’s computer is switched off. Traders who are more experienced can configure their bot based of technical indicators, or less experienced traders can subscribe to a signaller, which effectively allows their bot to trade on autopilot and execute trades based on recommendations by trusted and performance rated third party traders. According to Cryptohopper, they are the first and only automated crypto trading bot to integrate professional external signals. The bot also offers features such as: backtesting, trailing stop loss and technical analysis features including: Stoch, RSI, Bollinger Bands and MACD. Cryptohopper offers three subscription plans at varying levels of trading expertise: adventure hopper, advanced hopper and master hopper.
Zenbot is another open-source crypto trading bot that is set up very much like Gekko. Traders wishing to make use of the bot can head over to GitHub to download the code for free. Traders with coding experience can also choose to modify the code to better suit their needs if they wish. Zenbot supports multiple digital assets and offers functionalities such as: high-frequency trade execution and extensive backtesting.
Gunbot is another well known crypto trading bot that offers customizable trading strategies to suit the needs of the trader. Gunbot is flexible in that it can be used by traders with a significant experience in the market, to traders that are just starting out. Gunbot also supports a variety of cryptocurrency exchanges such as: Bittrex, Binance, Poloniex. Bitfinex, Cex.io, GDAX, Kraken and Cryptopia.
Crypto trading bots can be an extremely useful tool for traders if used correctly. One important element to highlight about crypto trading bots is that they should not be viewed as being a passive income generating tool. Crypto trading bots are really only as effective as the trading strategy that has been laid out. If one is able to regularly adjust the bot’s settings, and discover a trading strategy that works for them, then crypto trading bots can be a phenomenal tool for trading digital assets. In a global and gradually maturing market, there will undoubtedly be many opportunities that traders will be able to capitalize on. Doing so will require an absence of emotion and watching the markets carefully, things that crypto trading bots excel at doing. In sum, crypto trading bots have introduced an added layer of dynamism into cryptocurrency trading that, if utilized well, can be very fruitful for traders in the long run.