What is a Trading Bot? Are they worth it?

Due to Tesla, Apple, and Amazon stocks' meteoric rise, people have started taking trading more seriously. Bitcoin has also experienced unbelievable gains, with a lot of traders using trading bots for crypto trading. This makes one wonder whether there is something to automated trading.

What is a Trading Bot?

A trading bot is a software application that automates the trading of stocks, options, futures and other financial instruments. Day trading stocks is an entirely different game compared to long-term investing. While investing leans on business fundamentals to perceive underlying value before the market catches up and raises a business's valuation, technical-analysis-driven day trading focuses on market behavior and drawing patterns to get ahead of most investors.

Trading bots rose to popularity around this time as an alternative, low-cost money management solution. They were essentially a retail-friendly version of the algorithms used by Wall street quants. While portfolio managers used these bots to manage clients' active trade portfolios, the first bot made available to the public was Betterment by Jon Stein.

Trading bots, or formally called the automated trading system, have since evolved thanks to the leaps in artificial intelligence technology. Today, you can create different objectives, including a diverse portfolio and high-return investments. Human interference has been minimized, but the implications of mass adoption are yet undiscovered.

How do trading bots work?

There are different types of cryptocurrency bots. Some are more suited for beginners, while others require extensive programming knowledge to be set up.
Basically, the user needs to enter a set of parameters that will trigger a trade. Once they are running, bots scan cryptocurrency exchanges repeatedly. As soon as the conditions that were input by the user are met, they execute a trade.
To do this, they communicate with the user's cryptocurrency exchange account through an API and send buy, sell and stop-loss signals.
Some more advanced bots can even be programmed to follow broad trading strategies and use more complex indicators to emulate human thinking and even make use of machine learning.

Types of Trading Bots:

All types that any trader could take, as the bot is an algorithm written by programmers, they could put any logic in it.
In general, we have different types of traders:
• Long-term traders - investors;
• Swing traders - those who place orders on a week, month, or year basis;
• Day traders - those who place few orders through the day without moving them overnight;
• Scalping traders - those who place many orders per day, an hour, or even a minute.
All these trader types could be implemented in a bot.

Pros of Trading Bots

Even if you are initially skeptical about automated trading systems, you should look at the advantages they bring to an investor's arsenal. Here are some of the benefits available to a robot advisor user:

They Minimize Cognitive Biases
If you're making a purchase, you might believe that it is your free choice, but there exists a whole science to influence that leverages your biases to make certain offers too compelling for you to resist. Here are some of the cognitive biases acting upon your decision making:

Confirmation bias: If you start out thinking a particular stock is good, you'll overlook indicators implying it is bad and only seek what confirms your hypothesis.
Likability bias: You may invest in a stock because you like the CEO's personality.
Curiosity bias: You may hold a position because of curiosity regarding its future.

Inconsistency avoidance tendency: You may panic and sell your stock the moment there is a drop and miss out on future gains. While the above are four biases picked at random for illustration purposes, over 180 cognitive biases have been discovered to date. Using an algorithm to make trades on your behalf undoes the potential adverse effects of this decision-making.
Regardless of whether you're using trading bots for stocks or using trading cryptocurrency with robots, like Cryptoblizz, you will have the advantage of removing cognitive biases from the process.

They Subtract Emotions From the Equation

The emotional investor isn't ever the victor. One must know better than to let emotions interfere with profits but news media, including financial news, is emotionally driven and sensational. Active traders can lose a lot of money by giving in to their emotions.
An algorithmic trading platform can stay steady and follow the rules decided calmly by the trader. In a way, a trading bot is a way of automating calmness. Being calm is essential, especially in spaces like forex. Consequently, there are trading bots like GPS Forex Bot that cater to this exact market.

Better Back testing

When you say "thank you" to someone, how are they likely to respond? Usually, with the words "you're welcome". You know this from experience. Humans rely on personal experience to build predictive models of the future before making their decisions. From driving safety to boarding a flight, a lot depends on our knowledge based on previous experiences.
However, compared to the vastness of the market, our personal experience is relatively minute. Therefore, market history is a much better indicator, and back testing allows you to test your rules with stocks and securities by applying them to the past market performance.
When back testing simple ideas doesn't require an algorithm, using a trading bot can allow you to back test rules instantly, which brings us to the final advantage of these robots.

Faster Speed of Trade Execution

Because day trading, cryptocurrency trading, and forex are all time-sensitive, having even a fraction of a second upon the rest of the market can bring about unbelievable gain or avoid immense losses. Automated trading systems execute trades faster than humans, making them more profitable, provided the decisions are accurate.

Cons of Trading Robots

Disadvantages of automated trading don't come as much from the concept but the execution. Since there are multiple bots on the market, you have to be careful which one you pick. Here are some drawbacks specific trading bots might have:
Technical failure: A trading bot might suffer technical failure when you need it to sell or buy certain shares. To avoid this drawback, you must get a program that doesn't have a history of such failures.

Not completely hands-off: Another issue with trading bots is that they aren't completely hands-off. You have to keep an eye on connectivity, see if the robot is working, and fix any errors or dialog boxes that might appear and prevent functionality.

No guarantees: Although robots generally outdo humans in execution time and back testing, the rules of investing are ultimately decided by humans. These could be flawed, and the robot might not beat the market long-term. You can diversify by using multiple robots and giving each access to smaller funds.

Conclusion

Trading bots are a great way to execute trades based on rules you are confident about. With minimum execution time and great back testing, these programs can help you find stocks with strong fundamentals and ones with great short-term trading potential

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