What Are Trading Bots And How Can You Leverage Them

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What Are Trading Bots: Everyone looks to beat the stock market and make huge amounts of profits on their trades. It is easy to get lured by the fascinating stories we keep hearing about successful traders. However, stock markets can be a scary place for the average investor. With terms like arbitrage, short, limit order, bear, bull, etc., it can be difficult to navigate and regularly keep track of the labyrinth of the stock market.

A solution to this problem comes in the form of trading bots. Trading bots are fast changing the world of stock trading due to their simplicity and ease of use. In fact, according to The Economist, out of $31 Trillion in US equities, computers managed more funds than humans.

Also known as algo trading, automated trading, or system trading, they are automated computer algorithms that follow certain stocks, scan the market for important developments, and provide alerts to take timely action, based on certain rules or inputs.

How Does A Trading Bot Work?

A trading system allows traders to automatically execute trades based on custom-built rules for both buying and selling stocks. The automated trading software is linked to an investors’ direct access brokerage account.

In many cases, these trading bots provide strategy-building wizards or pre-built templates to build a set of rules that the platform follows to execute trades.

 

What Are Trading Bots

More advanced investors may choose to build their own customized strategies and indicators. While building these custom rules can be more complex, the rewards can also be of a much higher magnitude.

The trade entry and exit rules can be created for simple conditions based on entry and exit prices, the maximum you are willing to invest, the assets you want to invest in, your investment capital, and your risk profile. Or they can be complicated strategies that require a comprehensive understanding of the programming language specific to the trading platform or based on the expertise of a qualified programmer.

What Are The Advantages Of Using Trading Bots?

Removes the emotional barriers and biases

Trading bots execute trades based on rules and not on emotions. They will take trades that suit a particular strategy. This is very advantageous to investors who are likely to follow their heart and giving in to inherent biases, as compared to logic and market metrics.

Speed of execution

Since the trading algorithm or rules have already been specified, the bots can execute with greater speed. The system uses a real-time stock quote api, generating more opportunities for profit-making. Volatile markets offer the maximum chance of making a profit, provided the speed of execution is high. Thus, it is pointless to compare the speed of computer-based executions to human-based ones.

Monitor many indices

Automated trade bots can monitor changing scenarios in multiple markets like stocks, forex, futures, or cryptocurrencies across the globe. A good trading bot can be used to find opportunities in multiple trading markets through arbitrage, timing, or fluctuating market conditions.

Accuracy

One of the best things that a trading bot offers is accuracy. Whatever indicators you choose, for example moving average crossover, RSI, Stochastic, or any other, the bot will execute at the most precise moment based on your criteria.

Provides a comprehensive testing environment

An automated trading bot provides the perfect platform to test your trading strategies before putting them into a production environment. The platform also allows you to test in different scenarios and under varying market conditions. This will reveal the strengths and weaknesses of your strategies and let you hone them further.

Gives the trader more time

While initially creating the program, the trader may need to be heavily engaged. However, it will require minimal intervention once programmed, giving the trader much more time on their hands. Without the need to constantly monitor the markets manually, mistakes can also be minimized.

Getting your Strategy Right

By using a trading platform like Alpaca, you need to force your strategy to a level where it can be programmed. This gives a deeper insight into your strategy, something which commercial off-the-shelf bots lack.

Some of the other reasons why algorithmic trading is fast picking pace are lower costs, increased anonymity, and higher productivity.

Things To Consider Before Using Bots

You need to understand whether an automated trading platform can replace your carefully executed manual trades. Programming the right rules or strategies into the system can take a considerable amount of time, at least initially.

The more complex a strategy, the harder it will be to effectively program. If you are looking at a third-party trading software, do your research, read testimonials and reviews, and scrutinize the costs and fees associated with it.

Summary

The people who are successful with automated trading need to constantly watch how their bot is performing, adjust as per changing market conditions, and intervene when unexpected events occur. To taste success using trading bots, it is just as important to put in the hard work required to become and continually remain profitable.

Although trading platforms sound appealing, technical glitches or incorrect programming can be devastating. Finally, there is no substitute for trading experience and knowledge. With the right set of skills and tools, automated bots can surely show you the most profitable way for your trades.

 

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