How Do Trading Bots Work?

How trading bots can work for you

Mostly, trading bots are a hands-off experience. Consider them an investment that you have to periodically monitor. The more tenure you have with a specific trading bot the more trust you can have with the process of it performing trades. When you first sign up with a trading bot it will be important to monitor it to make sure it is behaving as it should.

One of the nice things about trading bots is all your funds stay on your exchange, the bot is just sending trading signals to your exchange, so you don’t have to move money around to get setup.

You can generally break trading bots into a four stage process:

• Data Analysis

• Signal Generation

• Risk Allocation

• Execution

Data and data analytics is king when it comes to trading bots. Unlike humans, bots can identify, gather and analyze data much faster and in smarter ways than us.

Once the data has been analyzed, signal generation by the bot is where it generates the buy/sell signal. They are basically doing the work of a trader by identifying trades based on market data and technical analysis indicators.

Risk allocation is how the bot distributes risk based off the preset parameters by the creator of the bot. On some bot trading platforms you can set the risk allocation yourself.

Execution is the final stage of the process and is when the specified cryptocurrency is bought and sold based on the trading signals that were preconfigured by the bot creator. During the execution phase, the bot will send buy/sell signals to whatever exchange you connected it with.