Have you ever heard about “whales” in the cryptocurrency market? The big money Bitcoin players supposedly have almost mythical powers of moving the price up or down at any time. Moreover, they are often used as an excuse for losing money on the market.

Unlike whales, bots are not mentioned as much. In fact, most people are not aware of bots, or at least know about them partially. There seems to be a low interest to automated trade programs that enable gaining a profit. Really? Free money?

Well, it is not as simple as it sounds. Though needless to say that trading bots, an online 24/7 computer program, are an exciting concept.

How does a bot work?

Using technical analysis and machine learning, bots can create optimal trading strategies in order to exploit the market. When compared with the human trader, bot follows only a limited set of rules that dictates its actions.

How to make one?

There are several online services that help you to create a bot of your own. If the task seems too hard, there is an option to rent a bot from a “botsmith.” Several online portals serve as a marketplace, where bot can be bought or rented for a monthly fee. They perform a wide variety of tasks, and can also be custom, depending on the preference of the customer.

The first task is to set of rules a bot will follow. This means determining points of entry and exit to the market. To do so, one can use, for example, crossover of Moving Average (MA) and Exponential Moving Average (EMA).

MA and EMA crossover signals a change in trend and can help understand price fluctuation.

Therefore, to run a bot we would write:

  1. Code that would import prices from the exchange
  2. Code that would communicate with the exchange
  3. Moving average equations
  4. Rule that orders the bot to buy or sell (depending on the moving average)

Will it really work?

Trading bots can be risky and challenging. Investing money and expecting software to behave flawlessly is not always a good idea. In many cases, bots stopped preforming as expected. This led to huge money loss and destroyed acquired profits. Just to name one example in the Bitcoin market, where a bot was trading 28000 Bitcoins daily, increasing market volume in 5 times.

Conclusion

A debate rages on usefulness of trading bots. Though having an apparently prompting future, they are still pretty crude and prone to errors. Especially in the financial markets where mistakes are unacceptable. On the other hand, high-frequency trading on the stock markets is already controlled by advanced bots. If one market conquered, it is just a matter of time when the cryptocurrency market is dominated by trading bots. Who knows, it might have already happened.

By Vasilije Markovic for CEX.IO