Whatever the reason, crypto trading bot development is a lucrative field, provided you get it right. In this article, I want to examine how companies can build their own trading bot so that they won’t have to pay to use existing ones.
I will begin by defining exactly what a crypto trading bot is before explaining how such programs operate. To do this, I will take a look at the different types of trading strategies these bots use before finally going on to explain how to make a trading bot.
Since the intention of this article is to provide an overview of the process, I will add links at the bottom of the page to articles that cover the process of creating a cryptocurrency trading bot in more detail.
Please keep in mind that articles often outline bot architectures and algorithms that quickly go out-of-date. For this reason, all of the articles I reference should be viewed as guides rather than a step by step process to follow.
If you don’t have experience in creating a trading bot then you should seek expert help to do so. A great tip on how to find the most up-to-date information and approaches is to hit the popular developer forums that include CodeProject and Stack Overflow.
Sites such as these are loaded with topics that will help and also serve as a great way to tap the best programmers for free advice on how to create a trading bot.
What is a Crypto Trading Bot
Since the beginning of the cryptocurrency boom that started in early 2017, people all around the world have been clamoring to trade in bitcoin and other altcoins. The problem with any commodity in the global marketplace is traders cannot be at their station 24 hours a day, 7 days a week.
Apple co-founder and tech guru Steve Wozniak recently admitted that he had sold his entire holdings of bitcoin because he had grown tired of constantly looking to see what the price was. Even the most dedicated trader will not want to spend their entire life staring at cryptocurrency price charts either.
Trading in cryptocurrencies is particularly addictive because the market is highly volatile. Bitcoin prices can and have dropped by as much as 25% in a day. While investors who are in for the long term might not worry about taking advantage of such fluctuations, cryptocurrency traders can make huge amounts of money from such volatility.
The solution to this problem is the trading bot. Such bots have been used by companies to set buy/sell commodities on global stock exchanges for decades. Trading bots help to automate the process and thereby relieving pressure on companies and traders.
Trading bots are software programs that use API’s to interact with financial exchanges. They actively monitor exchanges around the clock and will react in accordance to whatever predetermined criteria they have been programmed with.
How do crypto bots work?
To give a basic example, if a trading bot has been told to buy a commodity once the price hits $1 or lower, and sell once it hits $2, it will act in accordance with these limits, hopefully making a profit.
A cryptocurrency trading bot operates on these exact principles to facilitate the buying and selling of bitcoin and other cryptocurrencies.
Different bot trading strategies
Crypto trading bots rely on algorithmic trading in order to run and process complex mathematical formulas and automate and accelerate the trading process.
So, how do you do algorithmic trading?
Trend Following Strategy
This is the simplest trading strategy in which the bot responds to direct market changes. Trend following doesn’t require complex algorithms that need to factor in such things as predictive analysis etc., and so are very simple.
The arbitrage model involves cryptocurrency bots exploiting the difference in prices between the numerous cryptocurrency exchanges throughout the world.
Since there is no one centralized exchange to determine the price of a cryptocurrency – a role that with fiat money is a filled by the central banks – for this reason, prices vary from exchange to exchange.
South Korean exchanges, for example, have historically had a higher price than U.S ones, so offering good potential profits for anyone trading between the two.
Trading bots help traders take advantage of this differential by allowing them to trigger trades when certain price differentials are met.
The market-making strategy allows traders to buy and sell high volumes of currency and profit from the spread. In order to be able to trade such volumes, market-making traders rely on trading bots.
For a complete list of the main types of trading strategies, you can read this list.
How To Build a Crypto Trading Bot
Do it alone: Download an exisiting open-source bot
There are several ways that you can build a crypto trading bot. The cheapest and easiest approach is simply to find an open-source crypto bot that you can download and use straight away. This requires only a minimal amount of technical knowledge and helps to keep costs and development time to a minimum.
However, in order to build in your own features, continue development, and fix any bugs/security issues, etc., you will need to retain at least one expert software programmer. Since the bot has already been developed, the downside is that this approach often makes it harder to build in your unique features or adapt its trading algorithm.
Start from scratch: Get a great dev team together and start coding
Cryptocurrency trading software development can be both a personally and financially rewarding thing for those people who are able to be successful at it. The most important part of this approach is ensuring you have a team that is filled with passion and dedication, as well as all the relevant skills and experience, of course.
The most basic trading bot can be built in a matter of weeks. One such example is the arbitrage crypto trading bot built by Carlo Revelli. His bot allows for the trade between two exchanges, Etherdelta and Bittrex, and was created using his “own python etherscan API wrapper and pythereum to create the transactions and etherscan to publish them”.
Key steps to creating a trading bot from scratch
- Decide on the programming language you will use.
Finding a reliable Python trading bot tutorial, for example, can make things much easier for you.
- Getting hold of your APIs
Before you begin coding you will also need to get hold of the APIs that allow your bot to access whichever exchanges you want your bot to trade on. The good news is that all of the main cryptocurrency exchanges offer APIs to allow access to their currency data.
3. Create accounts with all the exchanges you will use
Account creation is a relatively straightforward task. Please keep in mind that different exchanges have different procedures for setting up new accounts. Some exchanges require personal information to be vetted and approved while others allow for anonymous trading. Vetting takes more time, so factor this in when project planning.
- Pick a bot trading model
Trend following, Arbitrage or Market Making etc.? Keep in mind that more complex trading models will require more development time.
Your bot’s architecture will have massive implications as to how it functions and performs. The key to how a bot operates is deciding on the algorithms it will use to interpret data. Algorithmic trading is a massive industry that makes billions of dollars each year in profits.
For any algorithm, the mathematical model on which it is based must be solid. If it is not then it is likely that the bot will either prove to be unreliable or will end up losing money. You can read more on the topic of mathematical modeling via this link.
Part of the process involves clearly defining the type of data you want your algorithm to interpret. For more complex trading models you will need your bot to be able to identify such things as market inefficiencies etc. This means it will need to be able to analyze historical trends as part of its function.
All of these things need to be considered before you get down to create a trading bot.
Once you have outlined your bot’s architecture you can get coding. Naturally, this will be the most time-consuming part of the process. If you have a team of developers working on different parts of the bot then it is vital to make sure that you have good project management/communications procedures in place.
Start by opening a group chat on Slack or a similar program where every member of the team can talk to one another. Hold weekly meetings to make sure each and every member knows where the project is and what problems have been encountered etc.
Testing has two key functions. Firstly, it is to make sure your bot functions as it should and is able to cope with the kind of data fluctuations that will be thrown at it. Factors such as risk vs. reward and modeling errors such as ‘overfitting‘ should all be evaluated at this stage.
The second function is in fine-tuning performance. Keep in mind that what I mean by performance is the optimizing the kind of behavior that you want your bot to exhibit.
By increasing the level of risk that the bot factors in, for example, you increase the chance of higher returns but also decrease the effectiveness of your bot to respond to high levels of price fluctuation, etc.
- Live Deployment
Once you have ironed out any issues, you are now ready to set your new auto cryptocurrency trading bot loose on the markets. While you might dream of making instant fortunes, remember that no platform in history has ever been launched without experiencing teething problems.
A good trading bot is an evolutionary thing. The more you put into its development the more you will get out. Constant monitoring of your bot’s performance is definitely recommended, at least for the first few months. After that, you should be confident enough to let your bot get on with it without much need for supervision.
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