How Do Trading Bots Work?
The ins and outs of how bots work
The process for setting up a crypto trading bot isn’t very challenging but there are some steps you need to go through to get connected. In order for you to be able to trade with a crypto bot, you need to have an account with a crypto exchange and then you will need to give your bot access through an API key. You can generate this key through your exchange and then copy/paste it into wherever your bot is hosted.
When generating the API key, you only will need to give the bot access to execute buy/sell trades, you do not need to give it access to withdraw or deposit funds.
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
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 the API to.