Building a Trading Bot: A Comprehensive Guide 

Have you ever dreamed of a stock market superhero? Imagine a tireless assistant who watches markets 24/7, executes trades based on your plan, and snatches up opportunities you might miss. That’s the promise of automated trading bots.

But hold on! Before you jump into building your own bot, it’s important to understand how they work and the potential risks. This guide will be your roadmap to navigating the exciting world of algorithmic trading. We’ll cover everything you need to know: building your bot, understanding the complexities involved, and making smart decisions about using one.

It is projected that equities will make up $8.61 billion of the algo trading market share by 2027. The algorithmic trading market is expected to grow at a Compound Annual Growth Rate (CAGR) of 11.23% from 2021 to 2026.

When joint-stock companies were formed in Europe, it paved the way for stock trading, which was integral to European Imperialism. From then till now, the world has undergone a significant transformation in economic, financial, and technological aspects. 

Today, besides stock trading, trading exists in cryptocurrencies and forex currencies. 

The advancements in technology and the heightening complexity of financial markets have given rise to the development of trading bots. 

What are trading bots, and how do they work? 

A trading bot can be defined as a computer program specially designed to automate the process of trading in financial instruments such as stocks, cryptocurrencies, forex currencies, and commodities. 

These bots have predefined rules and algorithms which are utilized for the analysis of market data. They work on a user’s or owner’s behalf and buy and sell assets at the right time to generate profit.

Key features of a trading bot

Trading bots have proved to be valuable assets in the trading market, and they have become a helpful tool for modern investors with many assets to pay attention to. Let’s look at some key features of trading bots.

1. Automated Trading

Automated trading belongs to the field of algorithmic trading. It is concerned with using a computer program to create buy and sell orders and subsequently submit them to a market exchange or center. 

Similarly, trading bots are devised to automate the buying and selling of financial instruments based on predefined rules and algorithms.  

2. Technical analysis

Technical analysis tools, such as chart patterns and moving averages, are used by trading bots to analyze the marketing industry and identify potential trading opportunities. 

3. Backtesting

Backtesting is an efficient way to determine the effectiveness of trading strategies on historical market data. This feature can aid users in improving their trading strategies and overall performance.

4. Risk Management

Trading bots also carry risk management features such as stop-loss orders. Such features are designed to limit an investor’s loss in case of unfavorable market conditions.

5. Customization

Trading bots enable users to customize parameters per their trading strategies and preferences.  

6. Order Management

Another primary feature that trading bots must have is managing orders, such as placing, canceling, and modifying orders, and effectively maintaining the tracking order history.

7. Real-time market data 

Real-time market data is the market data that is collected, processed, and analyzed continuously. It comprises current-day trades in the form of chronological trade registers, prices, and aggregate sizes of best bids or asks.

Hence, trading bots should be able to analyze real-time market data from various sources, including exchanges and news feeds.

8. Security

It is integral for the trading bots to be designed while keeping security in mind to shield user data, account credentials, and trading funds. 

9. Support and compatibility

The trading bots should efficiently offer users reliable customer support and technical assistance. In addition, such bots should be compatible with different trading platforms, pairs, and exchanges.

Types of trading bots

Trading bots are like automated assistants for the stock market. They come in various flavors, each tackling the market with a unique approach. Let’s explore some of the most common bot types:

1. Trend Followers: These bots are all about riding the waves. They analyze charts using technical indicators like moving averages to identify trends, then jump in and out of trades based on the market’s direction.
   
2. Arbitrage Seekers: These opportunists capitalize on price discrepancies between different exchanges. They constantly monitor multiple markets, looking for opportunities to buy low on one exchange and sell high on another, pocketing the difference as profit.
   
3. Mean Reversion Mavens: Imagine a rubber band snapping back to its original position. That’s the idea behind mean reversion bots. They identify price movements that stray too far from their historical average and trade in anticipation of the price “reverting” back to the mean.
   
4. News Sleuths: Stay ahead of the curve with news-based bots. These bots scour news feeds and social media, searching for keywords or phrases related to market-moving events. Armed with this information, they can execute trades before the hype hits the mainstream.
   
5. High-Speed Specialists: Precision and lightning speed are the hallmarks of high-frequency trading bots. They use complex algorithms and machine learning to identify fleeting market inefficiencies and capitalize on them in milliseconds.

This just scratches the surface of the diverse world of trading bots. Remember, with any automated tool, understanding the risks and setting realistic expectations is crucial. Stay tuned as we delve deeper into the world of algorithmic trading and explore how to leverage these tools effectively!pen_sparktunesharemore_vert

What are the benefits of using trading bots? 

Trading bots come with their own set of benefits and challenges. Let’s take a look at the benefits of using them. 

1. Trading bots are available 24/7

Trading bots are operational 24/7 and can efficiently operate without any breaks or sleep. Hence, users are not required to monitor the market day in and night, and they can generate profit on potential market opportunities that may arise at any time. 

2. Trading bots are quick in their tasks and offer new opportunities.

Trading bots can process large amounts of market data and analyze and execute trades much faster than human traders. With this, users can take advantage of the best prices at any given time, of small price movements, and attain better trade execution. 

3. Trading bots don’t give in to their emotions. 

As traders, letting your emotions interfere with your trading investments, strategies, profits, and losses can be risky. Active traders can lose much capital if they give in to their feelings.

It is where trading bots can lend you a helping hand. Since they are bots, trading bots can stay steady and comply with the rules the trader decides and programs into the platform. Hence, they help users in avoiding risks.

4. Trading bots eliminate cognitive biases. 

As humans, different cognitive biases tend to exist in our minds. And such tendencies make certain offers difficult for us to resist in the trading market and can directly influence our decision-making processes. For example-

i. Confirmation bias

As traders, several stocks can be looked at as “good” and “profitable” for us, but with this perspective in our minds, we can overlook indicators reflecting it as “bad” and only make decisions based on our hypothesis.

ii. Curiosity bias

Traders may hold a stock or cryptocurrency position based on curiosity regarding its future growth. 

iii. Likability bias

In some cases, traders tend to invest in a stock just because they like the personality of the person associated with it, such as the CEO.

iv. Inconsistency

Traders may panic and sell a particular stock as soon as they witness a drop in the market and miss out on future gains.

Hence, algorithmic trading platforms, whether used for trading in stocks or cryptocurrencies, tend to save traders from such drawbacks. 

Risks to Consider Before Using Trading Bots

Trading bots can be powerful tools, but like any powerful tool, they come with risks. Here are some potential pitfalls to be aware of before you unleash your bot on the market:

1. Tech meltdowns: Imagine your bot missing a golden opportunity because of a glitchy internet connection or a software bug. Technical failures can disrupt trades, leading to missed gains (or worse, accidental losses).
   
2. Overfitting the Past: Bots can be trained on historical data to identify patterns. But what worked in the past might not predict the future. Over-optimized bots become too reliant on past trends and struggle to adapt to changing market conditions.
   
3. Rigidity in a Chaotic Market: The beauty of a bot is its ability to follow pre-set rules. However, the market can be unpredictable. A bot lacking flexibility might miss opportunities or incur losses if it can’t adjust to sudden shifts.
   
4. Market Mayhem: Even the best bot can’t control external factors. Unexpected news, economic shifts, or global events can still disrupt your bot’s performance. Remember, market risk is always a factor.
   
5. Keeping Your Bot in Top Shape: Think of your bot as a high-maintenance race car. It needs constant monitoring, parameter adjustments, and software updates to function smoothly. Neglecting these operational tasks can lead to costly mistakes.

Challenges of automated trading

Automated trading has its benefits. However, it is not free from challenges. These are-

1. Cost

Developing a trading bot involves costs for various aspects, such as subscription, commission, and profit, regardless of the model. The rates vary from a few euros to several hundred or even several thousand a month. Hence, one should have enough financial resources to cover these costs. 

2. Security 

To trade bots to use your funds, they need to be given access to your trading account on a trading exchange by sharing your API keys with them. As a trader, sharing your API keys is not considered safe, as it can lead to various security vulnerabilities. 

Step-by-step guide on how to develop a trading bot

Developing a trading bot is a complex task and requires a deep understanding of the market, programming, and risk management, before acquiring one. Given below are the steps that you need to follow to create one-

1. Define the strategy

The first step is to think about and define the strategy that your trading bot will follow. The market determines what you plan to trade in, the assets you plan to trade in, and your ability to handle potential risks.

2. Choose a programming language.

The next step is to choose a programming language. Several programming languages are used to develop a trading bot, such as Python, C++, Java, etc.

Languages such as Python could help if you wish to expand your bot later to utilize machine learning. It is essential to pick a language that you are most comfortable with. 

3. Choose an exchange and connect to it.

Following this, you must choose a trading exchange where you can trade assets. It would be best to decide what help you sell, such as stocks, currencies, or cryptocurrencies, and where you will change. 

Note: While considering the assets you wish to trade in, cryptocurrencies can be a great choice as crypto markets operate 24/7. Traditional investments such as stocks can only be traded at certain times and principally on weekdays, and stock markets are generally open between 9 AM-4 PM and are closed on weekends.

a. Two requirements must be covered before choosing a trading exchange for your bot. These are-

i. It would help if you were legally permitted to trade on the specific exchange and the assets it offers. For example- several countries do not allow cryptocurrency trading.

ii. The exchange should have a public API available, as it is impossible to develop a bot if there is no endpoint to send requests. 

Once these requirements have been addressed, paying attention to other aspects of the trading exchange, such as fees, rating and popularity, and how good the API docs are, is integral. 

In addition to this, it is also advised to consider the exchange’s trading volume, as exchanges with low trading volumes will tend to need to catch up in terms of price movements in the market. 

4. Pick a server

Following this, you would require a server to send requests to the trading exchange’s API. For testing, one can run the server from their personal computer. Although to run the bot constantly, there may be better choices than your computer. Hence, one can use Raspberry Pi or a Cloud Provider as a server.

One can also use several other cloud hostings services such as AWS, Azure, GCS, or Digital Ocean.

5. Building the bot

5.1. Before beginning to build your bot, make sure you have checked these three things off your list-

i. Registered and obtained the approval to use an exchange.

ii. Implemented API usage on the business and had an API key.

5.2. Given below are the steps on how to build a bot-

i. First, a variable is needed to indicate the bot’s current state, either buy or sell. A boolean or enum would be appropriate for this purpose. 

ii. Following this, the parameters for buying and selling need to be set, as they indicate the percentage increase or decrease in price. 

Such parameters are called thresholds, and a total of four, two each, would be a requirement for each state. 

5.3. BUY Thresholds (If the bot is in a sold state)

i. DIP_THRESHOLD

This threshold follows the “buy low, sell high” strategy. By acting on this parameter, the bot will buy the asset when it is undervalued and later expect its value to increase so that it can be sold.

ii. UPWARD_TREND_THRESHOLD 

This threshold tends to act against the “buy low sell high strategy” and aims to find when the asset’s price soars higher as it does not want to miss out on the opportunity to buy before it goes even higher. 

5.4. SELL Thresholds (If the trading bot is in the buy state)

i. PROFIT_THRESHOLD

It follows the strategy of selling the asset if the price has exceeded the threshold since it was bought. It is how the profit is generated by selling the asset at a higher price than the purchase. 

ii. STOPP_LOSS_THRESHOLD

This threshold follows the strategy of selling the asset at a lower price than it was bought. The plan is implemented in conditions in which the market has gone down majorly, and the purchase is sold at a loss to prevent an enormous loss from happening. 

5.5. API Helper functions

The next thing that the trading bot requires is helper functions which aid it in obtaining the from the exchange’s API. 

In addition, be aware of what currencies the API post requests ask for while making a buy or sell operation. Getting the currencies right is paramount. 

For example- as a trader, if you are trading USD for Gold, you must specify how much gold to buy or how much USD to sell. 

5.6. Bot Loop cycle

Following this, it is integral to define the workflow of your trading bot. An infinite working loop with a specific sleep time must be programmed into the bot. 

For example, if you want your bot to try and make an operation every 30 seconds, it needs to be programmed into it. 

Through all the aspects working together mentioned above, we would have a trading bot with all the essential features operating in front of us.

At every step, our bot will identify its current state (either buy or sell) and attempt to make a trade based on the thresholds programmed into it. Following this, it will update the buy/sell state and the last price for an operation.

6. Upgrading the bot

The bot is ready in its basic form, but a few efficient things could still be added. These are-

6.1 Logs

The bot should be able to perform constant logging of its actions both to the terminal as well as to a separate log file. 

With the logging, the time of the actions should also be very well noted so that if the bot makes an error, it can be traced back precisely to where it happened.

6.2 Database

Although the trading bot does not require a database as it stores all the information in its memory, the database is still needed if, in any case, the bot fails. 

Hence, when it starts again, it will check its stored values in the database rather than acting upon its default values and continue from there. 

6.3 Dashboard

A dashboard is another primary addition that needs to be connected to the operations it performs and manages them. 

Having a dashboard allows your bot to be linked to a web server/API that permits you to control its functionality. 

6.4 Testing strategies on past data

Several trade exchanges permit traders to access past data to test their strategies before implementing them. 

It is efficient to see how well your trading strategies or thresholds would have worked and adjust them accordingly. 

7. Implement risk management strategies.

Another integral part of the trading bot development process is implementing risk management strategies to protect your capital from potential losses occurring in the market.

Developing a trading bot according to your trading style is necessary as some bots are only suitable for beginners and others for experienced traders.

Risks can be reduced through the use of stop-loss orders. If your bot does not carry such features, then you can reduce the chances of risks yourselves by only taking short positions. 

Before trading with real money, use a demo account to confirm that you are using the bot properly before risking your money.

Before using it, familiarizing yourself with customer support programmed into the bot is integral. Customer support will clear your doubts, extend support, and make you understand the automated trading process seamlessly and efficiently. 

8. Monitor and adjust

Keep a watch on the bot’s performance and adjust the algorithm accordingly. 

9. Deploy the bot

Now that your bot is entirely ready, it must be deployed in the market to begin trading. 

Conclusion

Automated trading bots are complex. Although they have proven quite efficient in automated trading, risks are also involved. Hence, developing a bot is a different ball game altogether, and one needs to have a deep understanding of the market and be cautious and well-informed in all the concerned areas before building one.  

At Idea Usher, our experts will guide you through establishing an efficient automated trading bot that suits your trading strategies. 

Get in touch with us now!

Contact Idea Usher

Email: [email protected]

Phone: (+1)732 962 4560, (+91) 859 140 7140 

FAQs

Q. What is an automated trading bot?

ANS: A trading bot can be defined as a computer program specially designed to automate the process of trading in financial instruments such as stocks, cryptocurrencies, forex currencies, and commodities. 

Q. What are the challenges or risks associated with automated trading?

ANS: Developing a trading bot involves costs for various aspects, such as subscription, commission, and profit, regardless of the model. Hence, one should have enough financial resources to cover these costs. And for bots to use your funds, they need to be given access to your trading account on a trading exchange by sharing your API keys with them. As a trader, sharing your API keys is not considered safe, as it can lead to various security vulnerabilities.

Q. How are trading bots quick in their tasks and offer new opportunities?

ANS: Trading bots can process large amounts of market data and analyze and execute trades much faster than human traders. With this, users can take advantage of the best prices at any given time, of small price movements, and attain better trade execution.

Q. What is the importance of the Dip_threshold strategy when a bot is in the selling state?

ANS: The Dip_threshold focuses on the “buy low, sell high” strategy. By acting on this parameter, the bot will buy the asset when it is undervalued and later expect its value to increase so that it can be sold.