Aleksey Shevchenko
25 December, 2019

How to choose trade bot?

A trade bot is nothing more than software made to execute an automated trading strategy. But companies that offer these kinds of services using bots implemented them differently. Some automate trading algorithms with the help of a constructor bot, and others invest cash into pre-prepared bots.

Whether you can make money with trade bots is a question that comes up all the time. In this article, we will discuss this and similar questions.

Complicated Trading Algorithms

Trading algorithms come in different levels of complication. By ‘complication’, I mean the function and amount of types of data that are the bot processes. For example, you can set your algorithm to make a purchase when the RSI reaches the oversold zone and sell when it reaches the overbought zone. In the first instance, the bot activates a simple automation that takes into account just one indicator. In the second instance, different types of data are processed, and the bot uses artificial intelligence.

It is clear that the more primitive the trade bot, the fewer possibilities for the bot to create a quality algorithm. You can’t just count on a constructor bot which only sets a parameter to enter a position.

Effective Trading Algorithms

All algorithms are written on the basis of trading strategies. Before all else, a strategy must be checked for profitability, or in other words, pass a back test. This tool is not included in many trading bots, but if you want to do algorithmic trading, you must understand programming and be able to work with large amounts of data. For a backtest, you need at least 2 years of data if you want to check how the strategy works over different market cycles. That is a source of many complications. The problem is that exchanges offer quotes from a very limited period of time, and more complete data is available only from supplementary resources of varying reliability.

After being convinced that your strategy works in light of historical data, you need to test your algorithm in real time. The profitably of the strategy may differ significantly between historical data and in real time. Sometimes parameter settings of a trade algorithm just end up being profitable, but only for a certain period.

If for some reason you can’t check the profitability of an algorithm and are convinced that everything is working properly, you cannot assess its effectiveness.

Illiquid Exchanges and Exchange Bots

It is almost impossible to trade on unpopular exchanges. There are those who earn money with non-liquid tools, but they are few. Launching a trade algorithm on such exchanges is not worth it, if, of course, it is not specifically set up for non-liquid platforms. The problem is that the main goal of these exchanges is the markups of traded volume. This can be done with bots that create liquidity and throw a wrench into our strategies. They create fake bids and fill the order book so that it seems to be full. In reality, the spread can be 20-50% or more. The difference between real bids might be 20%. With this kind of liquidity, a backtest might show positive profits when in practice they will not be. Exchange bots will not let you buy when and where you need and will provoke us to make a buy that is not in fact worthwhile.

Ready trading algorithm

Working with ready algorithms is a bit simpler, but brings other risks with it. The cryptocurrency market is still young and is just getting on its feet. This attracts are large amount of frauds who offer trade algorithms that do not work. Their real effectiveness can be checked only with trade statistics. If you decide to invest in a working trade algorithm, it is worth your while to examine the people offering services like copying their trades and be convinced of the authenticity of their real trade statistics. There are a number of advantages of this: you don’t need to burden yourself with developing trade strategies, complete backtests and spend your valuable time on it. All you need to do is find a ready trading algorithm, analyze its profitability, and negotiate conditions with the algorithm’s owner.

In conclusion, we can make the inference that trade bots can be effective and can help you earn money, but you must choose them carefully. If you want to use algorithms in your strategy, you need to be sure that the entire functionality of the product works correctly and thoroughly develops trades. If you invest, be sure that the profitability is backed by a history of trades.
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