What is a trading bot?
Trading bots are hugely popular now but they have actually been around for a number of years. Effectively, what they are is a collection of programs and software modules that automate elements of the trading process, allowing human traders to be more time-efficient and potentially more effective.
Whereas traders might once have to trawl through reams of market data to try and find patterns and trends, an effective algo trading bot can gather and interpret information at incredible speeds and even open and close positions automatically. In a world where timing can be critical, the advantages of a bot process transactions on the spot are probably obvious.
There are quite a few options when it comes to trading bot strategies and choosing the right one will depend largely on your approach to the markets. Those with a knowledge of programming might be able to build their own algorithms based on their individual requirements, but for most traders, we’d recommend using an established platform, such as AtoZ Markets.
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Understanding trading bot strategies
Trading bots and algorithms are by their very nature highly versatile and there are numerous ways in which traders can implement them into their approach to the markets. In reality, trading bot strategies are more or less the same as those that traders can do manually, it’s simply that bots are capable of processing much more information.
For example, trend following strategies, which involve going long when an asset is trending up and going short if it is trending down, have been popular for years. But whereas a human trader will need to scrutinise the charts and employ several tools to identify potential trends, a trading bot can run the numbers and generate trading signals in the blink of an eye.
Arbitrage trading is also amongst the most popular trading bot strategies. This involves looking for variations in an asset’s price between different exchanges and trying to profit by trading between them. Arbitrage trading is something that needs to happen quickly and in high volumes to be worthwhile, so once again the computational power of the trading bot makes them perfectly suited to the job.
Traders can also use trading bot strategies in conjunction with existing tools to further mitigate risk – including stop/loss and take/profit orders.
Are trading bots right for you?
As we’ve noted above, trading bot strategies are effectively the same as those used by human traders, just on an expanded scale. One of the main advantages of using an automatic trading strategy is that it allows for a single trader to conduct more analysis and open and close more trading positions in a given time.
However, it’s important to note that trading bots are not infallible. Users should not assume that because they are using a dedicated program, that they will instantly become more successful as traders. Bots are effectively conducting the same analysis that human traders do, just on a bigger scale.
When it comes to efficiency and success rates, figures vary according to providers. The algorithm-based trading at AtoZ Markets trade, for example, has been known to deliver a success rate of over 70%. However, once again, nothing is guaranteed.
When it comes to choosing a platform to start implementing trading bot strategies, then you need to think about which features are most important to you. These will of course vary from trader to trader but typically the following factors are important considerations:
Fees
Unless you build your own trading bot, then you will more than likely have to pay a fee to use trading algorithms. These will vary between providers and often the more sophisticated bots will come with a higher price tag. Make sure you find a service that provides what you need without paying over the odds for functionality you’re never going to use.
Usability
It goes without saying that you need to be able to actually understand how to use software involved in bot strategies. Platforms like AtoZ Markets offer intuitive, user-friendly interfaces to give you complete control. Others, however, may require a working knowledge of programming languages to really get the most out of them.
Many trading platforms will have a thriving community through which users can exchange bot strategies and approaches to trading. A good community is also a great way of ascertaining how reliable a platform is as unhappy users are unlikely to remain quiet for long.
Markets
Naturally, you’ll need to make sure that any platform you sign up to will allow you to apply bot strategies in your chosen markets. Some platforms may have multiple algorithms that you can use across various markets, whilst others may specialise in, say, crypto trading or Forex trading.
How to set up bot trading strategies
When you’ve found a suitable trading bot and integrated it with your trading platform, then it’s time to start thinking about bot trading strategies and how you can apply them.
Amongst the most popular ways of using trading algorithms is with trend following strategies. By analysing large amounts of market data almost instantaneously, a bot can potentially identify trends in an asset’s price movement. The trader then opens a long position if the asset is trending up and goes short if it is trending down.
Trends can often be short-lived, so many traders actually choose to autotrade – having the bot open and close positions based on its analysis. This is an extremely efficient way of trading and allows for traders to be in and out of positions in record time, which can serve to diversify risk.
Bots are also ideally suited for finding arbitrage opportunities – that is, small variations of an asset’s price between one exchange and another. Successful arbitrage trading requires fast transactions made in high volumes, which is why it is amongst the more popular bot trading strategies – it’s very difficult for the human trader to do so profitably.
Advantages and disadvantages of trading bots
Using trading bot strategies can have a positive impact on your results – there’s no doubt about that. However, it’s important to consider exactly why they are beneficial and what their potential shortcomings are. Here at TradersBest, we feel the following pros and cons are the most significant:
Trading bot strategies are based on data – nothing else
Trading bot algorithms are built according to tried and tested fundamentals. Every signal generated or decision made by a bot is base on solid technical analysis of existing data. A bot isn’t swayed by emotion or sudden fluctuations. They remain emotionless and 100% analytical at all times.
Higher trading speed
An automatic trading strategy allows for trading at much higher volumes than a single human trader could manage alone. This in turn means greater market exposure and potentially more risk diversification.
Bots can look at the big picture
A trading bot can crunch numbers in a way a human trader can only dream of. They can aggregate profit and loss and react according to a longer-term strategy. Of course, it’s possible for a human trader to do the same, but not with the same unwavering discipline that a trading bot is capable of.
Trading bot strategies can run 24/7
Markets like forex and cryptocurrency operate around the clock – something a human trader cannot do. This is where trading bot strategies can be a major advantage as they can be running 24/7, which again means more market exposure and the ability to trade as and when a trader chooses to, as opposed to when they are able to.
Trading bot strategies are fast becoming an essential part of speculating on the financial markets, but they aren’t without their detractors:
Some supervision is required
It would be bad practice to simply leave a trading bot strategy running and expect it to constantly return results. Instead, trading bots need to be monitored for performance and will occasionally require tweaking or updating to ensure they are delivering what they ought to.
Trading bot strategies are not get rich quick schemes
It’s important to be aware that trading bot strategies do not guarantee results. They simply offer more time efficiency and a way for traders to increase their volume and exposure to the markets.
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Trading bot strategies – Quick Questions
Where can I learn more about trading bot strategies?
Bot strategies are often the same as traditional trading strategies, just carried out on a much wider scale and at higher speeds. Here at TradersBest we have plenty of information and guides on various trading strategies and checking these out is a great way to start learning about trading bot strategies.
What are the best trading bot strategies?
The best trading bot strategies will differ from trader to trader. Some might prefer to receive signals and corroborate them with their own analysis. On the other hand, some traders might be better served by setting bots to follow a trend trading strategy on their behalf.
Can a trading bot trade for me?
Trading bots can be beneficial to traders of all levels but they are no replacement for a good knowledge base. Make sure you are familiar with the fundamentals of trading in general as this will help you to choose the right algorithms for your objectives.
Are trading bot strategies suitable for novice traders?
There are plenty of bot strategies that are geared towards novice traders. In fact, trading bots can do much of the leg work when it comes to technical analysis, which is something that novices often struggle with.
How are bot strategies made?
In theory, anyone can build an algorithmic trading strategy – provided they are familiar with a handful of popular programming languages. For those that aren’t familiar with coding, then understanding the inner workings of a bot is not necessary – it’s enough to know what they can do and how to use them.
Can you build your own algorithmic trading system?
If you know enough about how financial markets work and are capable of programming in at least one major coding language, then you have the option of writing a trading algorithm for yourself. However, remember that in addition to building a trading algorithm, you also need to test it.
For this reason, we advise most traders to opt for an established third-party trading bot. Not only will these have been built by professional developers, but they have also been tried and tested by the wider trading community.
Conclusion
Trading bot strategies are used by traders of all levels to try and gain an advantage in the markets. When used correctly, they save on a huge amount of leg work as a bot can analyse data far faster than a human trader. They can also process a much higher volume of transactions, which serves to increase market exposure whilst potentially reducing risk.
If you’re interested in getting started with trading bot strategies, then we recommend checking out a platform like AtoZ Markets, where you can take advantage of a free trial to find out how trading bots can fit into your current strategy.
Trading Bot Strategy – FAQ
❓ What are the best trading bot strategies?
Bot trading strategies don’t actually differ that much from regular strategies, it’s just that bots are often more effective in the analysis required to generate signals. Choosing the best bot strategy will depend on what market you are trading in and what your goals as an investor are.
💸 Will I make money with trading bot strategies?
Trading bot strategies can be very effective tools but they are just that – tools. They do not replace a solid foundation in trading know-how. Whether you make money or not will depend not only on which bot trading strategies you use, but also on how you use them.
🤔 What do trading bots do?
Trading bots have been growing in popularity in recent years and effectively allow traders to open and close positions in much higher volumes than was previously possible. Different trading bots offer different functionality, but ultimately they all provide a way of automating certain aspects of the trading process.
☝️ Are trading bot strategies scams?
If trading bots sound too good to be true, then they may well be. However, most reputable platforms now offer some kind of automation software. The best way to gauge how legit a trading bot is is by checking out reviews of the platform as well as listening to what the community has to say.
🤖 Should I use a trading bot?
Traders of all levels can benefit from using trading bots, but it’s important to manage your expectations. Before you start exploring the world of trading automation, it’s worth familiarising yourself with what a trading bot can and can’t do, as well as how some of the top algorithms gather data to generate its signals.
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