Mar 06, 2023

How to build a crypto trading bot

The scope of cryptocurrencies is expanding, so it attracts a large number of investors and people who just want to make money. If you trade on a cryptocurrency exchange properly, you can get good profit. However, it takes too much time to study all possible trading strategies. If you want to trade cryptocurrency and make money, a crypto trading bot will help you.

If you have already tried to trade and studied additional materials, you probably saw the info about cryptocurrency trading bots. Today, there are ready-made paid and free solutions and open-source trading bots, but you can also build your own crypto trading soft. Such options are in high demand because thanks to algorithmic trading with a crypto bot you can raise your earnings on the cryptocurrency exchange to a new level. So, if you are interested in developing a crypto trade soft, this material will be helpful.

What is a crypto trading bot?

First, let’s define the basic term of this article. What is a crypto bot? Everything is very simple, cryptocurrency trading bot is the use of a computer program or system to trade in the market according to a specified set of rules. 

In other words, the user creates a trading algorithm, which is executed in the market when all conditions are met. In simple terms, this is algorithmic trading. Users can choose any trading strategies and automate them (the service’s trading algorithm is called a strategy). This style is perfectly suited to the cryptocurrency markets, which offers several advantages to the user:

  • Price fluctuations, as cryptocurrency markets tend to have much higher swings than traditional markets and create large opportunities with trade options.
  • The 24/7 session of trade, as cryptocurrency markets are open for business at all hours.
  • The overall capitalization is smaller compared to traditional markets. Cryptocurrency markets are less saturated with large funds and as a result, don’t require large capital to trade and earn.

On the other hand, the high price fluctuations in a new trade market that never sleeps creates an ideal environment for speculation. And this is something you should definitely consider if you decide to trade in the cryptocurrency markets.

So, we’ve learned that a cryptocurrency trade bot is a software program. It is necessary for algorithmic trading and can be written in several languages, including Python. By the way, Python is the most popular option for creating a cryptocurrency trading bot today.

How do cryptocurrency trading bots work?

This software can automate many of the trader’s actions. Simply put, special trading software or crypto trading bot analyzes the situation on the exchanges and makes trades according to the scenario set by the developer or the user. 

The crypto trading bot can automate many operations and trade according to technical indicators, momentum, and fundamentals. Or you can build a much more advanced algorithm to help you execute orders more efficiently, from routing through different exchanges to dividing a large order into smaller pieces. If you are going to create a crypto trading bot from scratch, then you should consider several strategies:

  • Market making is an option that involves continuous buying and selling to reflect the difference between the buy and sell prices. However, this strategy has its limitations when liquidity is low or during periods of extreme competition.
  • Arbitrage is the buying and selling of an asset to profit from the difference in the cost of the asset between markets. Consequently, this option takes advantage of the difference in the cost of the same cryptocurrency on different platforms. A trader buys digital assets on one market and then sells them on another to make money.
  • The purpose of the following strategy is to identify the trend of an asset and execute trades based on the underlying trend. This option attempts to profit by analyzing the momentum of an asset in a particular direction. Traders executing this strategy will enter a long position when the cryptocurrency is trading up and sell the position when the trend reverses.

Depending on the complexity of the algorithm, you will need to use different tools to build a trading bot and automate many operations. These tools, in turn, will depend heavily on the level of technical skills you currently possess.

You also need to keep in mind that crypto trading bots work differently when we talk about the interface. For example, some have a special browser plug-in that allows the trader to communicate with the bot. Other crypto trading bots provide users with basic systems that can be downloaded as apps. Some variants take the form of software created specifically for exchanges.

7 steps to create a crypto trading bot

If you want to automate your trade on the exchange and create a crypto trading bot, then you will need to have a clear plan of action. Let’s take a step-by-step look at all the actions you have to perform:

  1. The first point is to select the language you will use (Python or any other). This is up to you, but it is best to choose Python or JavaScript. Some languages, like Python, may be preferred if you plan to equip your bot with machine learning mechanisms, for instance, in the future.
  2. The next important step is to select an exchange and create an account. For the crypto trading bot to perform its main tasks, it needs access to a platform on which it can trade. Selecting an exchange and knowing how to use it is very important. So you need to make decisions about what you’re willing to trade and where exactly you’re going to trade.
  3. The crypto trading bot code must run on a server that allows the bot to send requests to the exchange API. While testing the soft, your computer can of course act as a server. But if you need to run the software all the time, this is not the best solution. But most users will probably select a cloud provider.
  4. Next, you need to select the type of trade bot and confirm the algorithm. The architecture of your bot will have a significant impact on its productivity and the quality of its core functionality. 
  5. You can start writing code as soon as you describe architecture. Once you’ve prepared the helper functions, you can start writing the actions. When the basic architecture is ready, you can also improve your creation a bit by adding some features. 
  6. If you want to organize the visualization of the trade bot’s activities and manage it without editing its code, you may want to connect the bot to some kind of control panel. To do this, the crypto trading bot must have its own server API for the management of its functionality.
  7. It is necessary to test the product to verify the correct execution of all its tasks. Be sure to evaluate factors such as risk-reward ratios and modeling flaws. Once you’ve made sure that everything is working correctly, you can use this software on the market. You may also be lucky enough to create a soft that a large company is interested in, then you can earn even more.

Keep in mind that you can write a soft in any language. However, Python is still considered the most common because its ecosystem is full of open-source libraries and out-of-the-box solutions. Python is also relatively easy to learn.

Trading bot platforms or custom options?

The best bots get their information from multiple sources. They also use AI and machine learning to decipher which news is socially relevant and which is likely to have a major impact on market prices. 

Many people wonder whether to choose platform offerings or custom development. Remember, there is no perfect option, even though the cost of bots has reached incredible levels. They still generate losses, even though the intention is to limit risks. Therefore, you can either find a good off-the-shelf solution or use a custom option.

Сrypto trading bots: legal or not?

You have nothing to worry about as bots are completely legal and incredibly popular among users. Running them will not result in your account being banned or suspended. However, not all brokers allow the use of this soft.

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