How Useful Are Trading Bots?

Sep 17, 2020

What is automated trading?

Automated trading is the process that involves using EAs or expert advisors programs, also known as trading bots, that are used by traders to speculate market conditions and trade on their behalf based on preset algorithms. 

The algorithms use technical analysis to open orders, trailing stops, and more. Automated trading allows you to remove emotion when trading, which means you can follow through with your planned strategies. 80% of the stock market is executed through trading bots.

It’s important to remember that trading bots follow the strategies traders set for them. A solid trading plan is established first, and market conditions must be favorable. Automated trading is often referred to as “High-Frequency Trading” because trading bots execute trades much faster than a human possibly could.

What are the benefits of automated trading?

– 24/7 trading and market watch

– Human emotions and gut reactions are eliminated

– Multiple real-time trades can take place simultaneously

– New opportunities and trends are analyzed by the bots and presented to traders.

How does automated trading work?

Traders must pick a platform to trade on and set their trading parameters based on the strategy. The strategy will be based on their experience and will allow them to create a custom algorithm to place orders on their behalf. The algorithm detects at what time the trade should occur and at what price the trade should be opened and closed.

The trading bot will monitor financial markets and execute trades automatically if applied to the pre-established parameters. The objective behind using trading bots is to execute faster and more effectively. 

What are the different types of trading bots you can use?

Before you pick a trading bot to use, it’s important to acknowledge that trading bots are just tools designed to help us trade on a 24/7 basis. By no means are they a magic solution that you can use with no experience and earn money with. 

There are different types and categories of trading bots available, such as:

Trend trading bots: These bots pay attention to an asset’s momentum, and after analyzing it, they either buy or sell order. When a trend trading bot notices a price increase, it will enter a long position. If the price drops, it will enter a short position. Trend trading will ensure that the asset moves in the same direction. Trend trading bots use technical indicators and technical analysis to predict price fluctuations based on historical data like volume and price.

Market maker bots:  These bots use orderbook spreads to earn profits. The spread will be wider based on how actively it’s traded- the wider it is, the more money the market maker will make. These bots seek to sell at a higher value than the selling price when it’s possible. The bot will scan markets for wider spreads on a 24/7 basis.

Arbitrage bots:  These bots utilize arbitrage, a concept that uses trades to find imbalances in prices. This method is usually used by highly inefficient cryptocurrency markets. These algorithms monitor asset prices from several various markets. If a particular coin’s price increases at one exchange and lowers at another, the bot will buy the cheaper coin and then sell it for profit. The price discrepancies are common, but they do not last long.

Coin lending bots: Another bot commonly used for cryptocurrencies. The bot allows you to automate the processing of lending coins to margin traders, who will pay you back the loan with a percentage. 

What is essential to consider before using trading bots?

While automated trading and EAs (expert advisors) are great tools, it’s key to remember that they will not guarantee that your trades will be successful. To utilize trading bots correctly, the trader must prepare an in-depth strategy based on the knowledge and expertise of the market they’re working in.