Crypto Trading Bots · A helpful guide for beginners [2020]
Everything you need to know before you start your journey
Welcome to your Crypto Trading Bot Journey
Hey, I’m Janny.
Me at the start of my career at Citi after the obligatory tie-cutting ceremony
I’ve been a trader at Citi & Merrill Lynch for 7 years and recently I started applying my algorithmic trading knowledge to the cryptocurrency space. I’m here to share what I’ve learnt in the hope that it helps you too.
Cryptocurrencies as an asset class are volatile, very volatile. Now, as a buy and hold (or hodl 😏) investor, volatility isn’t what you want. Imagine the pain of losing 20% of your entire hard-earned money in one day or even worse 23% in 15 hours — ouch!
However, for a trader, volatility is great.
Being able to invest at lower prices when the market is having a tantrum and offloading risk when the market is in euphoria is literally the life-blood of a market maker at an Investment Bank.
If we could apply the same principles to create algorithms and then automate the whole set up, well that would be just fab now wouldn’t it?
This is exactly what I’ve been working on for the past 1.5 years and I’m finally close to having something I can share with the world.
Enough about me though, let’s jump right in.
What exactly are crypto trading bots anyway?
Cryptocurrency trading bots are computer programs that automagically buy and sell various cryptocurrencies at the right time with the goal of generating a profit.
That’s literally it.
It’s important to note here that not every bot is profitable, in fact, most aren’t.
It is trivial to make a working bot, less so to have a profitable one. @pdesgrippes
So,
Ideally the bots actually generate a profit and ideally that profit is greater in risk-adjusted terms than had you have just bought the same coins and held them throughout.
When I say risk-adjusted, what I mean is that your positive gains relative to the negative gains you’ve suffered whilst being invested is better. To demonstrate this have a think about the following,
Which would you rather have:
- Daily returns of 1% every single day with zero negative days, with a total return across the year of 250%.
- Returns of +10% Monday, -5% Tuesday, +3% Wednesday (and so on) with a total return across the year of 500%.
Hopefully you picked the first one.
See,
The first example is consistent. And when something is consistent it becomes a lot less risky.
In fact, you should still prefer the consistent returns of the first example even if the second one ended up at 1000% over the course of the year.
Hint, the key is in compounding: 1.01²⁵⁰ — 1 = 1103%. This is really outside the scope of this article though.
The point here is that given the option of consistent (strong) returns and a rollercoaster ride, you should almost always pick the consistent option even if the rollercoaster ride may land you with higher returns in future.
High returns isn’t enough, you want high risk-adjusted returns.
And this is really what makes crypto trading bots such an interesting proposition. If we can find a way to capture most of the upside of cryptocurrencies yet without the regular gut-punches, this would make a much more attractive investment proposition than what the hodlers have to offer.
How do crypto trading bots work? (no jargon!)
Most sophisticated trading bots work with 3 moving parts:
[signal generator] -> [risk allocation] -> [execution]
Signal Generator
This is where we make predictions. There will be some data that goes into the signal generator and a buy or sell signal pops out of the other side.
If you see any bot’s that use “technical indicators” then it’s probably a good idea to try not to make eye contact and just back away slowly. 👀
Risk Allocation
This takes the buy or sell signal then decides how much to buy. As in, should we allocate our entire capital to this trade or just a portion? Should we buy all in one go or should we average in?
So now we know the direction, we know how much we want to buy or sell, next is the part that actually executes the trade.
Execution
See, if you have a lot to buy in one go (say you have to buy $10,000,000 in total for 500 clients) then you probably don’t want to do this all in one trade as you’re unlikely to get a favourable price.
You ideally want to dribble your order into the market.
If you have the exact same bot as 1000 other people and you’re all running in disjoint instances (i.e. they don’t communicate with each other) then this is really going to give you unfavourable pricing.
All three parts, signal, risk, and execution, need their own distinct algorithms and optimisation processes applied. If you have a bot that fudges through any of these parts or worse, disregards them altogether, it won’t hold you in good stead for profitability.
What is the difference between a trading bot vs a human?
- Longevity. Bots can operate 24/7, humans need to sleep (and rest).
- Speed. Robots operate magnitudes faster than a humans thinking time plus reaction time.
- Emotionless. Robots aren’t driven by greed or fear. They’ll always do what’s statistically more likely to win.
- Capacity. Robots can process gigabytes of data per second. Humans quite simply can’t process that much data in that timeframe.
You see, there are many benefits to running bots and it’s all down to their skill set being vastly different to that of a human. Bots are consistent and monotonous. To be profitable you need consistency and quite frankly have to do everything thats highly counterintuitive to human nature.
Like, running towards the fire.
However it’s worth bearing in mind, a bot, any bot, is only ever going to be as good as the human creating it. The old adage is true, garbage in, garbage out.
There are ways in which humans can outperform and that’s mainly with subjective thinking.
When a particular piece of information doesn’t have a specific outcome attached and lateral or second-degree thinking is needed to understand the implication then you’re better off with a human.
I wouldn’t really worry about this too much because whenever a bot reaches a state that’s fairly subjective it can choose to not invest at all.
What are the different types of trading algorithms used?
Without going too technical (I can cover this in another post if anyone wants) there are really only ever two types of algorithm used. They’re disguised in different ways and called different things but this is really all there is to it.
Momentum
Prices are up and we think they’ll continue to go up = Buy (or vice versa). Statistically, most momentum strategies don’t win particularly often but when they do win their gains are fairly large. Win:lose rates of around 55% with gain:loss of around 70% are fairly common with profitable algo’s.
Mean-Reversion
Prices are up but we think they’re due a pull-back = Sell (or vice versa). Conversely, most mean reversion strategies win more often than they lose however the gain to loss ratio is smaller. Win:lose rates of around 70% with gain:loss of around 55% are also pretty common with profitable algo’s.
Yup, it’s that simple.
A commonly overlooked factor that greatly impacts your profitability is your fees.
See,
Your transaction costs (paid to the exchange) and trading costs (bid offer) can have a drastic effect on how much your bot makes.
Exchange fees can vary whether a bot is a liquidity taker (passive) or a liquidity maker (active).
The best algorithms will manage their active to passive trade ratio and also trade across multiple exchanges dynamically choosing an exchange based on the optimal transaction costs.
Bot’s that only eke out a small statistical edge can have this completely swallowed up in fees if it’s the aggressor on every trade.
Are Crypto trading bots profitable?
Now, admittedly I haven’t gone out and tested a bunch of bots yet however we can turn to our good friends over on reddit and other blogs to see what the consensus is from those that have used bots available on the market.
All commercial bots I’ve tried lost money compared to buy and hold, no matter what settings were tried. — intertron
If bots worked everyone would use them. This does not discount the private bots used by BlackRock and other massive trading firms. We will never have access to the data and teams of devs that they do. — vibrate
It is safe to say that the best bots are the ones you never hear about and will never be offered. — Kai Sedgwick via Coin Trellis
Its a good way to lose all your money….if people here don’t know what they are doing in the market I wouldn’t expect them to be able to […] set [a bot] up so it is useful. — Person51389
This is unfortunately where the reality of the current trading bots (available to the public) kicks in.
Algorithmic trading can be extremely profitable.
However,
The problem really is that there’s just a huge level of disconnect between the knowledge base of professional investors vs the hackers that build these sorts of algorithms and then make them available to the public.
The fact that so many public-facing forums still tout technical analysis as a viable investing tool gives you a small glimpse into the extent of the problem.
And don’t even get me started about overfitting.
The lack of profitability of existing solutions is what motivated me to start creating a platform for the crypto community in the first place.
What to look out for when picking a trading bot
Before you buy/trial/invest in any bot, ask yourself these 3 questions:
- What is the professional experience level of the senior leaders of that firm? If they haven’t managed >$100m and have a good track record doing so, you should probably bat on.
- Are their algorithms widely known and openly available to anyone? (hint: if they’re giving you trade-level data then their algorithm can quite easily be replicated). If so, whatever “edge” their bot has will be quickly arbitraged away.
- Is their success aligned with your success? If you lose money are they willing to cut their fees? If you make money will they succeed too? If they just hand you a platform and send you on your merry way to figure things out by yourself it’s never a good sign unless you know exactly what you’re doing.
Unfortunately, choosing a trading bot to go with isn’t as trivial as answering these three questions.
In my opinion, everything ultimately comes down to people.
Forget about the marketing malarkey surrounding the company and ask yourself, would you trust this person with your money?
Where to go from here?
About Credium
We’re creating a “set and forget” crypto trading bot platform which is ideal for beginners (although applicable to experienced folk too) with the basic premise that our bots are already fully optimised to run out of the box.
We also take full responsibility for the profitability of our clients as opposed to leaving you out there all by yourself.
All you’ll need to get started is:
- $1000
- To press a single button to get the bots started
There’s an early bird offer on there too for the first members given we haven’t launched yet.
Get in touch
I always reply to comments so if you have questions just drop them below or email me: firstname at credium dot io.
