Understanding the mechanics of trading bots
Trading bots are essentially computer programs that make use of different indicators to spot trends and execute trades in an automated fashion. Although the use if algorithmic trading software has been in practice by hedge funds dealing in equities, commodities and currencies, the market for trading bots has extended into crypto asset market. As a sort of automated trader, a bot buys and sells in an automated manner typically in the short-term market. Since trading bots tend to be preprogrammed, there is a general idea that they are more efficient than humans since they are not prone to executing trades based on emotional decisions.
Bot trading can be described as a technique that uses pre-programmed software to analyze market actions including price, orders, volume and time. They are now a common feature of many stock exchanges and are for the most part legal in many countries across the globe. In the cryptocurrency market the use of bots is common although it is a relatively new practice if compared to equities markets for instance. Some Bitcoin trading bots have been successful at establishing more efficient trading and are certainly used on many cryptocurrency exchanges.
Making a case for the use of trading bots
There are several reasons why investors opt to use bots, such as:
- Easy market entry point for inexperienced traders
- Maximizing profit potential by having a mechanism that is responsive to market shifts around the clock
- Bots offer a less emotionally demanding way of trading
Due to the rise of electronic exchanges, algorithmic trading has become a growing trend. In a network connected to electronic exchanges, brokers or traders can program buying, selling and trading related tasks such as monitoring price action and market exposure with relative ease.
Crypto asset management with algorithmic trading
Although they are not entirely perfect, cryptocurrency trading bots have made the process of trading easier on crypto exchanges that are run 24 hours a day. These algorithms trade on financial markets on behalf clients. The NaPoleonX project is pioneering the implementation of Smart Competitive Investing solutions dedicated to crypto-currencies holders in order to bridge the gap between crypto-currencies holders and quantitative investing through implementing a revolutionary investment platform built on Ethereum’s decentralized blockchain.
The market for crypto asset trading is enormous and growing exponentially and the introduction of trading bots and algorithmic trading in this space is timely. With only a limited number of investors currently having access to highly performing investments funds, the opportunity for bot trading is tremendous. Due to high initial capital requirements, not to mention the physical trade constraints, operating costs on capital flows and other factors; it is no wonder that expert teams with combined experience in the asset management, private equity, banking finance space; including quantitative developers in the derivatives pricing, electronic trading and asset management arenas are using their combined expertise to bring a unique way of investing in crypto using a crypto asset manager running experienced trading bots.
Advantages of Algorithmic Trading
It is far easier to write a computer program that will automatically monitor the stock price and the moving average indicators and then place the buy and sell orders when those predefined conditions are satisfied but there are also many other benefits to trading using bots. Some of these include:
- Accurate timing of trade order placement;
- Reliable way of executing trades for the best price;
- Reduced transaction costs due to limited human resource requirements;
- Automated checks on various market conditions;
- Less risk of human error;
- Real-time data trading;
- Traders don’t need to keep a watch for live prices and graphs, or put in the orders manually; and
- The algorithmic trading system automatically executes trades by correctly identifying the trading opportunity.
The developing trends in trading bot technologies
Looking at the ongoing developments in the derivative markets for cryptocurrencies such as futures and the integration of cryptocurrency with other major payment solutions, the market is ripe for innovation proliferation. For example, NaPoleonX has already developed overperforming strategies over different time horizons for various asset classes including equity indices, Gold, BTC, FX, and credit. With these strategies, an investor has ample options to begin managing a portfolio of quantitative strategies. The team at NaPoleonX also acknowledges that other players in the markets are also starting to develop strategies that meet their requirements and that could be complementary to their quantitative trading strategies. They have even begun attracting traders in order to combine their strengths, while continuing to develop new strategies.
Examples of different types of trading strategies
- Trend Strategies — these include following trends in moving averages, channel breakouts, price level movements, etc.
- Mathematical Model Based Strategies — this allows trading on a combination of options and its underlying securities, where trades are placed to offset positive and negative deltas.
- Arbitrage — Implementing an algorithm to identify price differentials and placing the orders allows efficient profitable opportunities.
- Index Fund Rebalancing — these trades are also initiated via algorithmic trading systems for timely execution and best prices.
- Mean Reversion — this generally involves identifying and defining a price range and implementing algorithms for trades to be placed automatically when price of asset breaks in and out of an established range.
Breaking down How trading bots work
Every trading bot comes with a set of indicators and parameters that trigger a buy or sell signal when those indicators align with the predetermined strategy consequently informing an exchange of choice to execute a specific targeted trade. In most cases, a trading bot is preset to work in a specific market and during a set time period. Depending on the strategy to be implemented by the trading bots, one can make significant gains but this does not mean that they are not exposed to some level of risk. Some bots are even used to help reduce lost and not just for linear profit making. Due to the unpredictability of markets, an array of possibilities is always worth an investor’s consideration. The advantage with using bots is that if a bot is not performing accordingly, traders can simply pause or change the bot and still make manual trades if necessary with the option to revert to bot use when it is more in sync with the investment strategy.
Challenges facing algorithmic trading
With so many cryptocurrency trading bots on offer, it is advisable to do your investor’s due diligence and research the methodologies of the companies offering trading bot technologies. There is a wide range of services, from open-source free software to subscription-based bots typically used by professional crypto traders. It is also important to note that cryptocurrency trading bots tend to vary widely in terms of quality, usability, and profitability. Some of the other challengers that businesses, investors and traders face include:
- Getting top programming talent with in-depth expertise in computational trading, such as optimization and machine learning etc;
- Infrastructure challenges such as backup power and network connectivity;
- Dependency of durable hardware;
- A lack of fine-tuned strategies; and
- Inadequate trading strategy testing.
The 1st crypto asset manager piloting trading bots
NaPoleonX aims to reduce asset management mistakes typically attributed to human error in the digital asset management with an investment solution dedicated to cryptocurrency holders, through the creation of an open online computer driven asset management platform selecting quantitative strategies from world class traders. With each crypto-fund dedicated to a specific asset class, they hope to enhance the traditional model by improving its governance through smart contract implementation.
NaPoleonX specializes in low frequency quantitative trading on liquid assets through futures only which makes it possible for them to handle very large amounts and provide regular returns. Through implementing an ecosystem of new asset management tools in the form of trading bots which are underpinned by open-source, efficient, secure technology they stand at forefront of the future in crypto asset management. To ensure trading bots don’t malfunction or execute wrong trades NaPoleonX has come up with a solution to deal with this problem and it comes in the form of a Decentralized Autonomous Fund (DAF) which consists of a multiple trading bots strategy that blends them into one DAF. It is essentially a combination of multiple trading bots.
NaPoleonX is also is developing the technology which enables them to use derivatives to hedge crypto currency fluctuation. With their ICO currently in progress as of the day of writing this, they have already raised over 50% of their 15 million Euro target proving that although quantitative strategies have only seen wider acceptance in the last decade or so, more and more people are starting to grasp the true workings of this sometimes discredited way of trading. For more information about their technology, you can read their comprehensive literature on these subjects here.