What is a day trading bot?
A day trading bot might sound like something from the future, but in reality, it is simply a set of programs that automates certain tasks related to trading. In fact, day trading bots have actually been on the scene for a number of years and experienced traders have long relied on them to do much of their legwork.
There is an abundance of information when it comes to trading and it can be tough to keep track of everything – especially when trading in high volumes, as is the case with most day traders. A day trading bot can gather data, analyse previous price movements and identify the most opportune time to buy or sell a particular asset.
There are different kinds of day trading bots available and, whilst they usually operate in a similar way, there are variations in what they can do. For example, FXGrowth bots can simply be used to generate signals for the trader to decide whether to act upon, or they can actually open and close trades automatically, according to set parameters.
How do day trading bots work
There are different types of trading bots available and they vary in complexity and functionality. Different day trading bots may have different fees or be optimised for a particular market. However, generally, the majority of day trading bots will work in a similar way, addressing the same key factors. These include:
Market Data Analysis
Also known as technical analysis, a day trading bot will gather market data – including an asset’s previous price history – and analyse it to generate trading signals and find suitable entry and/or exit points. This is something that is hugely time-consuming for a human trader and, of course, processing data at high speeds is what computer systems are built to do. Some day trading bots allow users to customise the data streams used.
Similar to the first stage, day trading bots use existing data to try and identify potential risk – which is of course hugely important for day traders. The bot then uses this data to inform how much to invest and for how long.
Day trading bots can also involve an algorithm that effectively collates all the data to buy and sell an asset. In theory, having a bot execute trades is no different to the trader executing them manually, but the advantage is that using a bot means the whole trading process can be completely automated.
Are day trading bots effective?
It’s important to manage your expectations and understand what day trading bots can do and what they cannot. These are not a ‘get rich quick scheme’ and you should not be under the impression you can simply set a bot to task and watch the cash roll in.
Just as top professional traders do not win every trade, the same is true of day trading bots. What these algorithms do is effectively the same as what human traders do – only faster. As such they should be seen as a trading tool – a strategy even – that offers to speed up certain aspects of the trading process.
However, day trading bots are certainly effective at facilitating high volume trading and generating signals that might otherwise be missed. At FXGrowth, for example, signals have been known to show a success rate of over 70%.
Choosing a day trading bot
As we’ve already touched upon, there are quite a few day trading bots out there and it’s important to find one that will fit in with your individual trading style. Choosing a day trading bot should require a little research and there are a few key factors that you might want to look out for:
Firstly, day trading bots are often optimised for particular markets. This means that you’ll need to consider which assets you intend to trade – crypto, forex, CFDs, for example, and find a suitable algorithm. Day traders might cover several different markets, so it might even be necessary to make use of more than one trading bot.
To use most day trading bots you will usually need to pay a fee. Depending on the provider, this might be a one off payment to purchase the software license, or an ongoing subscription fee. This is an important factor to consider and it’s worth shopping around to get an idea of price variation.
The best way to find out whether a day trading bot is right for you is by actually trying one out with a demo trading account. FXGrowth is a good option here, as it offers a 14-day free trial, during which time you will receive trading signals from our advanced trading algorithms. Using a free trial will also help you get an idea of exactly what day trading bots do.
It’s often difficult to find hard data on results generated by day trading bots due to the nature of the industry. However, ideally you’ll be able to find examples of traders who’ve had a positive experience with a particular algorithm or bot. We often recommend FXGrowth, as its algorithm-based method has been known to show success rates of over 70%.
Some day trading bots allow the user to customise them according to their particular requirements. However, often these represent the more advanced end of the scale and novice users are advised to stick with tried and tested algorithms based on reliable trading strategies. It’s also important that any trading bot you use has an interface that’s accessible and easy to use.
How to use a day trading bot
Once you’ve sifted through all the day trading bots on the market and decide on the best one for you, it’s time to actually put it to work. Once again, not all bots work in the same way but depending on your goals and the platform you choose, you have a few options as to how you actually use trading signals and algorithms.
You can use signals generated by day trading bots to pursue trend following strategies, which involve going long during an upward trend or selling short during a downward trend. Alternatively, day trading bots are perfectly suited to arbitrage trading – wearing traders look to profit from the difference in an asset’s price across different markets or exchanges.
Day trading bots are also compatible with another popular approach to the markets: copy trading. This involves mimicking the trades of successful pro traders or even other bots. Day trading bots can automate this process entirely.
It’s also worth remembering that many traditional trading tools can be used in conjunction with day trading bots, such as setting stop/loss orders to minimise losses if a position turns against you, or take profit at a certain threshold before a change in price direction.
Advantages and disadvantages of day trading robots
Day trading bots are now hugely popular and it’s fair to say that most top-level traders are using algorithms in some part of their trading strategy. Whilst the more advanced trader may seek to program their own bot, the abundance of third-party bots on the market means even those with no programming knowledge can reap the advantages of automated trading.
So what exactly are some of these advantages:
Bots take the emotionless out of trading
Most traders will know that watching the markets can be emotional work and unfortunately this can lead to errors in judgement. For example, traders might be too hasty in selling a position if they see it turn against them, even though this may have been an expected part of the strategy. Day trading bots don’t suffer from this weakness and remain non-emotional and systematic at all times.
Higher trading speed
Timing is crucial when it comes to entering and exiting the market and day trading bots can process information, assess risk and process transactions at a rate that a human trader could never hope to achieve. This is where day trading bots can really prove their worth and provide a major boost to any traders activity.
Traders never know what’s going to happen and changes in the markets – as well as their personal lives – can impact upon their experience of the markets. For example, a run of bad luck might lead a trader to lose discipline and/or abandon one strategy for another. Market volatility can also lead to a trader making short-term decisions that may be harmful in the long term. Day trading bots are always looking at the bigger picture and maintain constant trading discipline.
Day trading bots can also contribute towards risk diversification. Firstly, as we have discussed, they have a built-in risk assessment module, to weigh up a particular investment option. Secondly, using multiple day trading bots is another way to reduce exposure to one particular asset.
Trade around the clock
Finally, day trading bots don’t get tired or require any downtime. Several markets, such as forex and cryptocurrency, are active 24/7. Day trading bots can be put to work whilst a human trader is busy sleeping. In this sense using a trading bot is like having a second trader on hand to work the night shift.
Of course, day trading bots aren’t perfect and there are a few disadvantages that are worth bearing in mind:
Some supervision is still needed
Day trading bots can automate a lot of the legwork involved in playing the markets, but they can’t just be left indefinitely. Its performance needs to be monitored and things may need tweaking. In addition to this, whereas many novice traders see bots as a shortcut to trading success, there’s no getting around the fact that the more you know about trading, strategy and risk assessment, the more efficiently you can make use of day trading bots.
Trading bots aren’t foolproof
Finally, day trading bots aren’t foolproof. Results are never guaranteed and software needs regular updates to keep track of the ever-changing world of the financial markets. Issues relating to computer hardware can also affect how efficient a bot is.
Day trading bots – Quick questions
What do day trading bots do?
Day trading bots effectively take on some of the leg work involved in trading. This might include analysing data, identifying trends or opening and closing positions. Because they can collate data much faster than a human trader, bots can prove a powerful trading tool in the right hands.
Where do I find a day trading bot?
There are numerous day trading bots available online and choosing the right one will depend largely on your goals and strategy. The best way to start using a bot is by finding a platform that specialises in your chosen market and opening an account.
Can day trading bots make me money?
Bots can be an excellent addition to your trading arsenal and have been known to boost efficiency. However, nothing is guaranteed and bots should simply be seen as just another tool for technical analysis, rather than a guaranteed money-maker.
Do I need to understand programming to use day trading bots?
Whilst some traders do indeed program their own algorithms, the good news for non-techy types is that there are plenty of third party day trading bots on the market that are available to traders of any level. You’ll usually have to pay for the service, but a trusted provider will have the advantage of having thoroughly tested its software.
How effective are day trading bots?
Traders should always beware of any trading bots making bold claims about how effective they are – it depends almost entirely on how they are used and what bot you are using. However, we have known some bots to show efficiency of up to 70%.
Day trading bots can be powerful trading tools in the right hands and offer traders a way of gathering market data that would be impossible with some form of automation. However, just like any other trading tool, bots come with a learning curve and traders should be prepared to do their research. If you’re interested in getting started with algorithm-driven trading, your best option is to open a demo account and find out what’s what.
Day trading bot FAQ
🤔 Do trading bots work?
Day trading bots are nothing new – they’ve actually been around for a number of years now. However, they get more and more advanced every year. If you’re considering using trading bots, then the best thing to do is start researching what they actually do and how they work, this way you’ll get an idea of whether or not they are effective.
🤷♂️ What are day trading bots used for?
There are numerous trading bots on the market and different programs will serve different functions. You can find bots that are specific for certain markets, such as forex and crypto, or those that work with a particular trading platform. To find out more, why not check out our guide to day trading bots.
💰 Can day trading bots really make profit?
Many people get the wrong idea about day trading bots and assume that they represent some sort of ‘get rich quick’ option. However, it’s important to understand exactly what bots can and can’t do. For more information, take a look at our guide to day trading bots.
❓ Do I need to use day trading bots?
Day trading bots are hugely popular at the moment and there’s no denying that they can do things that a human trader simply cannot. However, whether you actually need to use them or not will depend on your trading goals.
🤖 What’s the best day trading bot?
Different day trading bots have different functions and the best one depends largely on your individual circumstances. Some traders may prioritise software that is highly customisable, whilst others might prefer trading bots that are easy to use. Finding out your priorities is the first step in finding the best trading algorithms or bots.