A trading bot is software that gains access to a speculator’s account through an API gateway. Ideally, the software automatically monitors the volatility of quotes for digital assets that interest the trader, identifies patterns, and concludes transactions according to the parameters specified by the player. The more complex the program, the more aspects the utility tracks and takes into account.
In Forex and options trading, such instruments have been used for quite a long time, having proven themselves on the positive side. Unlike classic exchanges, trading in digital assets occurs around the clock, without breaks on weekends and public holidays. As a result, bots for the cryptocurrency market are a relevant product that greatly facilitates the work of a trader.
Trading bots - a little history
Back in 1949, Richard Donchian invented the concept of an automated trading system, developing a set of rules for buying and selling assets. Eventually, in the 1980s, famous traders such as John Henry began to use the concept of "rules-based trading." Since then, trading bots in one form or another have become quite popular in the market.
Unfortunately, they tend to be quite expensive and out of reach for average investors. A Bloomberg terminal can cost more than $10,000.
There are two main use cases for trading bots. First, investors can use bots to make the trading process much easier and streamlined. Bots allow you to perform actions such as portfolio diversification, index construction, portfolio rebalancing, etc.
The second use case is much more complex and advanced. In this case, the bot will try to consistently beat the market and make a profit. However, this approach requires a lot of preliminary research.
However, with the advent of cryptocurrency trading, the rules of the game have completely changed. The cryptocurrency market is open 24/7 and is very volatile, so the demand for bots is greater than ever before. Because many people prefer to trade Bitcoin passively and cannot devote enough time to dynamically analyze the market. Thus, cryptocurrency trading bots will be useful for users to conduct effective trading.
About starting work, initial costs and prospects
Typically, people who come to the field of algorithmic trading are looking for something new and want to get away from simple manual investments.
And the more they immerse themselves in the industry, the more they realize that it is highly fragmented and involves different types of strategies. For example, I was interested in making money with minimal risks, so initially I was creating mechanical trading systems (MTS) based on following trends. However, I quickly realized that in the market there are not only pronounced market movements, using which you can make money, but also periods of calm, “sideways” - when prices move up and down with a small amplitude. During such periods, trend strategies show poor results, and an account drawdown is possible, so I quickly switched to arbitrage strategies, which I still do today.
The entry threshold in this area depends on the selected segment. The mentioned trend strategies are usually quite simple to implement and do not require a lot of capital, so the amount of investment can be quite small - 100,000 rubles is enough. If you need to create something more high-tech and complex, then developing a competitive product will not be easy.
For example, our foundation has been doing approximately the same thing for 10 years; the code of our robots is measured in many hundreds of thousands of lines. To start from scratch and reach the level of a company like ours will require a significant investment of time and resources. In our business, a popular phrase from Alice Through the Looking Glass is “To just stand still, you have to run as fast as you can.” This is also why the main expense item for us is the salaries of financial engineers and developers. The competition is very high, so you have to constantly think about improving your strategies so as not to be left behind.
Blocks that make up a bot for trading cryptocurrency
All the best robots usually have the following things in common
- Backtesting.
- Implementation of strategy.
- Execution.
- Scheduler.
№1 Backtesting
Before you make any trades with your chosen bot, you should test it on historical market data. In this case, testing should be as realistic as possible. Be sure to consider latency, slippage, and trading fees.
You can get high-quality market data by accessing stock APIs. Libraries like CCXT allow you to interact with a bunch of exchanges at once.
#2 Strategy implementation
It is very important to determine in advance the trading strategy that your bot will follow. At this stage, you define the logic and formulas that will help your bot determine when and what to trade. After creating a strategy, you need to backtest it to see how it works. Next, we'll talk a little about strategies you can implement.
No. 3 Execution
So have you tested your strategy?
The next step is to execute it in real time. At this point, the logic you programmed into the robot will be converted into API requests that the exchange can understand. Some bots even allow you to simulate your strategy in real time using virtual money.
#4 Planner
Now that you've coded your strategies and tested them in the real market, it's time to automate the entire process. To automatically execute trading strategies, you need to set up a scheduler.
