Bot Trading - What You Need To Know

Trading can be one of the sexiest part-time or full jobs a person can get. You see success stories, suit and ties, films based on real facts and good cars, and you want to be part of that. But the stairway to heaven isn’t a smooth process.

There are many obstacles along the path that will hamper your trading goals. Amongst these ones, you should put special focus on preventing overtrading, feeling of revanche, emotions, working long hours, risking and leverage too much of your capital.

A groundbreaking innovation

Traders have been developing new methods over time that would tackle these hazards. As a result of this, a whole new trading style arose, algorithmic trading.

It meant the beginning of a new trader. A trader that would make use of complex algorithms combining variables to trade in the financial markets. This would convert the traditional trader working long hours analyzing charts in a person who backtests strategies and monitors trades.

The computerization of the markets began back in the 70s with the introduction of certain electronic features, such as the designated order turnaround (DOT). However, orders still had to be executed manually.

This developed very quickly into new electronic features during the 80s and 90s, something that the market adopted with open arms. Nevertheless, it was in 2001 when a team of IBM researchers presented a paper at the International Joint Conference on Artificial Intelligence, where they showed that two algorithmic strategies, MDG and ZIP, consistently outperformed human traders.

As time went by, more electronic markets opened, which allowed the further development of bot trading strategies. Very large financial institutions started researching and creating their own trading bots. For example, Guerilla, developed by Credit Suisse; Chameleon, by BNP Paribas; or Stealth, by Deutsche Bank.

Trend following, arbitrage, volatility, mean reversion and many more strategies have been automated. Nowadays, automated trading strategies are widely used by both institutional and retail traders. It has developed from complex algorithms to very user-friendly platforms in which a user can easily automate his/her own trading bot.

What are the advantages of a trading bot?

As previously mentioned, there is proven evidence of automated trading strategies outperforming manual traders. Let’s dive a bit deeper to find how trading bots can help us to improve our results. These are some of the most important factors we should take into account:

Emotionless

Emotions can be one of the biggest trading saboteurs a trader can find. They will make you overtrade when the euphoria takes over you after some positive trades, and will produce you a big feeling of revenge when you have had losses.

If there is something you can be sure about, is that these emotions will come to influence your trading in a rather negative way. An automated trading strategy will immediately evaporate any external factor that hasn’t been predetermined in the strategy.

Tireless

The stock market is open 8 hours a day, 5 days a week; the forex market 24 hours a day, 5 days a week; and the cryptocurrency market never closes. Depending on which asset you are trading, it can be pretty exhausting.

There will be times when market will reward you with several profitable opportunities in a small period of time. But get ready for the opposite, long periods of “flat electroencephalogram” charts in which the price doesn’t give you any opportunity to set an order. This can be really despairing for a trader.

A trading bot can be really helpful with this. It can trade in time frames in which you might not be in front of the charts, like the Asian market if you are living in Europe, or the sleepless cryptocurrency market when the volume pumps.

Unlimited markets

Do you see the trader in the picture? He is actively trading and monitoring more than 10 markets. When your trading style covers many different markets, it might be too complex to monitor every single one of them with accuracy.

On the other hand, automated strategies, other than sticking to your strategy, they will be able to trade an infinite number of markets. Whether your strategy operates in five or a hundred assets, a trading bot will be able to cover each of them.

Disciplined

Easily done by a bot, but common mistake of the human trader. This is one of the toughest things for a trader. Stick to your trading system and do NOT deviate from it.

Sometimes the charts will tempt you to open positions in setups that are not included in your trading system. Therefore, that haven’t been strongly backtested. On the other hand, a trading strategy161692 will perform in exactly the same way that it did during its test period, what will avoid many mistakes.

Faster

Volatility is the fuel for price movements and, therefore, what makes a market appealing for a trader. Volatile markets will offer several opportunities for any trader, no matter what the strategy is, and a fast execution is key to close a position with profit.

An automated strategy will be able to open or close positions as soon as your criteria is met. Even a few seconds can be crucial for the profitability of your trading system, which gives advantage to algo trading since the reaction is instant.

Customizable

No doubt, there isn’t anything as customizable as you in front of the charts. However, a good trading bot can imitate most of the functions of a human trader.

Automated stop loss, take profit, trailing stop loss, technical indicators and even candlestick patterns.

This process usually results in automated trading strategies that, if backtested strongly, they can reach the consistency over time. It is the reason why big corporations like the institutions mentioned above are benefiting highly from it.

Backtesting

Human traders can backtest strategies, however it might be extremely time consuming to backtest manually long periods of time and several assets. On the other side, a trading bot is able to undertake a whole backtesting process in a matter of seconds.

Doesn’t matter how many assets or time frame. Once you have designed your strategy, select period of time and the asset, and let it run!

Accuracy

If there is something you can be sure about when using a trading bot, it’s accuracy. Price and indicator’s information are data streams. Whether you trade overbought/oversold zones, moving average crossovers or any other type of indicator, your bot will open or close a position at the most precise moment according to your criteria.

It will be totally accurate with the strategy that you have designed after exhaustive periods of backtesting.

Should you use trading bots?

Of course, there might be downsides as well. However, most of them can be solved or highly reduced by imposing daily or weekly monitoring to the strategies.

Whether you should use them or not depends on your preferences as a trader, the type of strategy you are implementing and its degree of automation. What seems to be widely accepted in the trading community, is that any type of automation of your strategy can produce substantial improvements to your results.

These possibilities range from a simple stop loss or take profit, to a fully automated strategy that will trade 24/7 for you in several markets.

If you would like to give a try to trading bots, click here to get your 3-day free trial!