How automated trading bots work
Automated bots are built using the concept of technical analysis. For starters, this is a type of analysis that focuses on chart movements. By identifying certain patterns, a trader can make decisions on whether an asset price will continue rising or reverse.
Examples of popular chart patterns are head and shoulders, wedges, and triangles. There are also other candlestick patterns like Doji, Hiroku, and morning and evening star.
Most bots are created using the concepts of technical indicators, which are tools made using mathematical concepts. Examples of the most popular indicators are moving averages, relative strength index, average directional index, and MACD among others.
The idea behind these bots is simple. For example, the robot will implement a buy trade when an oscillator like the Relative Strength Index (RSI) and Stochastic move to an oversold level. Most robot developers focus on at least three indicators.
People trade using robots for a number of reasons. For example, a highly experienced trader will typically use a bot to diversify their income. In this case, they continue trading manually while their automated accounts also make money. Newbies, on the other hand, use robots since they don’t have trading expertise. So, here are some of the top assets that you can trade using automated trading bots.
Cryptocurrencies
Cryptocurrencies have recently become one of the most important assets in the world. For one, the total market cap of all cryptocurrencies has grown from zero in 2008 to over $2 trillion. Further, the total value locked in decentralized finance (DeFi) has moved to over $200 billion. While crypto prices have declined in 2022, analysts believe that their growth will continue in the long term.
Cryptocurrencies are usually attractive to day traders because of their volatility and the fact that they are traded on a daily basis. This is unlike stocks, where the market is usually closed during the weekend.
Digital coins are offered by various types of brokers, including cryptocurrency exchanges like Binance and Coinbase and decentralized ones like Uniswap. They are also provided by forex and CFD brokers,
In the past few years, many developers have used their knowledge of software programming to build cryptocurrency bots that can open and close trades. Some of the most popular cryptocurrency bots are Immediate Profit, Bitcoin Profit, and Bitcoin Era.
If you would like to invest in crypto using a trading robot, take a look at the following guide on how to start trading with Immediate Profit.
To trade cryptocurrencies using bots, you can decide to build your expert advisor from scratch or buy one that has already been built. It is recommended that you always run the bot through a backtesting exercise.
Forex
Forex is another asset that you can trade using an automated bot. The bots used in forex are similar to those used in other sectors like cryptocurrencies and stocks.
Most forex trading happens in MT4 and MT5 ecosystems. Fortunately, the platform’s developers have created a marketplace where people can easily buy and rate bots of all types. After buying the bot, you just need to install it in your platform, run it through a strategy tester, and then launch it in your live account.
There are many types of bots used in forex. For example, there are some that are based on scalping techniques and those that are based on swing trading approaches.
Stocks
It is also possible to trade stocks using automated bots. Indeed, there are many well-known hedge funds that focus on this strategy. The best-known one is Medallion Fund, which is owned by Rennaisance Technologies. The fund has been around for years and has consistently outperformed the broader market. Other similar funds are 2Sigma, D.E Shaw, and PanAgora among others.
Still, it is usually a bit difficult to use bots in popular brokers such as Robinhood and Schwab. For example, Robinhood tends to focus mostly on mobile trading, which is a bit difficult to use bots with.
Summary
Trading bots are popular tools used by both individual traders and large hedge funds. In this article, we have explained how these bots work and some of the most important techniques to use them in the financial market. Also, we have identified assets that you can trade using bots. Others are commodities, indices, and even exchange-traded funds.
While robots are useful in trading, they are also significantly risky tools. Therefore, it is always recommended that you first test them in a demo account. Also, start with a small account and then add more funds as you assess its performance.