Understanding the Basics of Cryptocurrency Trading Bots

We explain cryptocurrency trading bots and bot trading. The goal will be to give you an introduction to using bots to trade cryptocurrency for you.[1]

NOTE: For the time being, this page will just cover “what trading bots are” so that those learning about cryptocurrency trading for the first time can get a sense of what bot trading means. Any trader watching the exchanges is going to notice small orders filling the order books and orders being placed inhumanly quickly and wonder how it is done: bots do it. For some tips on using bots, see our page on tips for bot trading for beginners.

What is a Bot Trading? What is an API? What is a Trading Bot?

  • What is bot trading? Bot trading is using software to talk to an exchange via an “API” to place buy and sell orders for you. It is done in both cryptocurrency trading and other types of trading. It is fully legal and welcome on most cryptocurrency exchanges; however, only specific brokers outside of cryptocurrency allow it.
  • What is an API? An API, or Application Programming Interface, is an interface for an application that allows it to send and receive specific types of data. For example, it can be a way for your bot to interface with the exchange to place buy and sell orders and to collect price and balance data.
  • What is a trading bot? A trading bot is a program that can execute trades for you on an online exchange based on parameters defined by the programmer or user. For example, a program that will buy when the RSI is of a cryptocurrency is low and sell when the RSI is high.

In summary: Your program (for example your trading bot) <- -> The API (a part of an app, for example part of a cryptocurrency exchange), the bridge between your program and the app <- -> the app (for example a cryptocurrency exchange) receives commands via the API from your program and outputs data to be sent through the API to your program.

How Trading Bots Work With Cryptocurrency Exchanges

Most cryptocurrency exchanges allow you to utilize an API to interact with the exchange.

This means they have an interface that lets you both pull data from the exchange and make specific changes to your account using a program.

Specifically, automated programs that make trades on an exchange using an exchange’s API are called “trading bots.”

Using a trading bot + API allows you to execute trades programmatically.

You can buy or create a program that executes a specific trading strategy that or someone else has defined.

I.e. “bot trading.”

Is Using a Trading Bot Legal?

Not only is using a trading bot legal, but it is often welcome; a thin market is bad for everyone, so the more trading, the better.

FACT: Bot trading is fully legal in cryptocurrency and the stock market (although only certain brokers allow it). With that said, anything that would be illegal under normal circumstances is illegal in cryptocurrency trading. You would be unlikely to make or buy a spoof bot or pump and dump bot without expecting trouble; Instead, you want to focus on (for example) making or buying a bot that follows indicators or works as a market maker.

Are Trading Bots Profitable?

Trading bots aren’t inherently profitable. Instead, the success of a bot depends on several factors:

  1. The accuracy of the software (the bot, the API, the app)… if something glitches, it can be bad.
  2. The quality of your strategy (you need to tell the bot what strategy to follow; thus your bot is only as good as your programmed strategy and its execution).
  3. Market factors (if a market crashes or spikes, or if you are trading in a thin market, bad trades can be made even if the bot and exchange are working as intended).
  4. How you adjust your bot (or how your bot adjusts) to different market conditions (a strategy can make money in one market type, but lose money quickly in another).

The bottom line: A bot trading can be insanely useful in the 24/7 global market which is cryptocurrency, as no human can react to the market 24/7. However, there is a lot that can go wrong, and it takes a good chunk of time, experience, and knowledge to get to the point where you are using a trading bot confidently, with fail-safes built in, and with success. If you are starting out at square 1, tread very carefully and only give the bot access to small amounts of capital. There are some serious barriers to entry given the skill needed and costs. Thus, bot trading is not going to be the best choice for everyone. However, if you have TA down and your main problem is not being able to be at your computer 24/7, or if you find yourself needing features that aren’t native to exchanges (like trailing stops), then a trading bot might make sense for you.

Getting Started Bot Trading

Below are some basic things to know when getting started with bot trading. This isn’t a step-by-step bot set-up guide, just a list of what you need to know to make your own choices.

  • As with cryptocurrency mining, there isn’t much information online geared toward bot trading beginners, and there are some barriers to entry. Barriers include the need to understand some basic coding, need to understand crypto trading, and need to understand some technical analysis (TA). If you have specific questions, you can ask me below.
  • Bot trading isn’t inherently profitable. In fact, you could lose money quickly if you don’t play your cards right. Many bots cost money, plus there are fees, plus a bad strategy for a given market and trading pair can result in a loss. Bots are very useful, but they also come with lots of complicated risks.
  • You can buy a trading bot, lease a trading bot, find a demo, use a free open source platform, or create your own trading bot. We won’t recommend any bots here since we want to do a full review on each bot first (that is in the works). A basic Google search will tell show you that some popular bots and trading platforms for creating bots include Haasbot, Cryptohopper (affiliate link and free trial), Gunbot, and Gekko. Of those I’d recommend Cryptohopper for a first timer due to it being easy to use and free to try out. You can click those links to get a sense of the different types of bots, and then do some research to see which if any are right for you. See this article from “Medium, Let’s write a cryptocurrency bot. (part 1)” for information on how to create your own bot.
  • Most bots and bot creation platforms allow backtesting and live testing. Logically you want to run tests before you start trading. Run tests. Run more tests. Run tests while your bot is live. Test the current market, a sideways market, an uptrend, a downtrend, and do this five times over. Realize that backtests don’t speak to future results. This step is vital!
  • You need to create an API key on the exchange you want to use to interface with the exchange. You’ll need to put your key and the related “secret” in the bot to access the API (some exchanges also require unique sets of information). Never share your secret (it is like your private key or password), and be very careful about which platform you go plugging your secret into (anyone who has that info can access your bot). If your bot platform gets hacked, or if your keys get stolen, then someone else will have access to your funds and can trade them (making bad trades). So security is really important here!
  • If an API allows you to make withdrawals, you’ll likely want to ensure withdrawals are turned off (this avoids the bot withdrawing from your account; then the worst it can do is make bad trades). Only very specific types of traders will need their bot to withdraw any funds from their account.
  • You need to have the bot running for it to trade, so your computer needs to be on and running, or you need another solution such as a cloud-based server. Since this is true, services like Cryptohopper [for example] are a little more newbie friendly as they host the bot for you. As a trade-off, you can’t customize a bot Cryptohopper the way you can something like Gekko (an open source customizable bot with its own limitations and hurdles).
  • Now for a a few tips: I suggest using stops and trailing stops if you bot trade. I suggest turning your bot off when needed (is the entire market crashing, no need to run a “strat” AKA strategy built for a bull market!). I suggest manually locking in profits or taking losses as needed. I suggest small buy-ins, especially to start. I suggest being very careful about what coins you play. I suggest testing strats on many charts before you go thinking you struck gold. I suggest using longer time frame candles until you get the hang of things. I suggest including a few failsafes if you can like “if below X disable selling, or if above Y disable buying” (i.e. protect yourself from a flash crash). There are a ton of pitfalls and traps one can fall into with bots, if you jump in too quick you could get burned. So take your time and be methodical.

Hopefully, this bare-bones bit of bot trading information has helped to clue you into what bot trading is and how it works.

As our team works through the different bots, we will offer more articles geared at helping to provide beginners guidance on using bots.

Make sure to do your research and tread very carefully. There is a lot of room to go wrong [really, really, bots can go dreadfully wrong quickly], and again, we haven’t personally reviewed all the bots and platforms noted above.

Trade-offs: There are a lot of compromises you need to make when choosing a bot. If you program from scratch, you have tons of flexibility. If you choose a platform, you have to work within the confines of the platform. You also have to consider security.

Bottom line: Put everything together, and you have a lot of trade-offs that you need to make and more than a few barriers to entry; you need a specific range of skills to make everything work. Still, if you work through all that and find the right bot for you, and it can be rewarding given the 24/7 cryptocurrency markets which demand you either miss some of the trading day, never sleep, or get a bot to execute your strategy for you.

Trailing stops and Signals: One of the best things about bots is that they can do things exchanges don’t let you do. Trailing stops (or creeping stops) are one example of this. It can make sense to use a bot just for features like this even if you aren’t going to build or buy a strat to get buy / sell signals. Signals are another example. Without a bot you can join a signal group and then manually buy /sell when you get a buy / sell signal. With a bot that can integrate signals, you can automate that process. Add in automated stops and automated signals and you have a useful bot without much in the way of a strat. There are lots of reasons to automate trading. Bots can also be programmed to do things like arbitrage and accumulation. Sky is the limit, especially if you can program your own or find the right bot for you.

WARNING: Be very careful about bot trading USD/BTC (or Tether/BTC); arguably the most popular trading pair. Generic strategies tend to perform poorly on this pair because other bots expect less advanced bots to do things like trade 12, 26, 9 MACD on 2-hour candles. You don’t want to be using a strategy that is easy to exploit, so consider tweaking your strategy a little, running back tests, and starting with small amounts. This is yet another reason why you need to tread carefully when using bots. In general I would always err on the side of longer time frames to suss out the noise (so if I used 12, 26, 9 I’d use it on 2hr – 4hr candles rather than 30 min candles for example). Crypto can be really volatile.

WARNING: Your bot won’t necessarily know if the price is very high or low. If there is a flash crash or sudden spike, your bot could end up buying way too high or selling way too low. If you are programming your bot, try to create measures against this. The lower volume the coin / exchange you are trading on, the more this could be a problem.

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  1. Meet the Bots That Let You Trade Bitcoin in Your Sleep.” Coindesk.com.