Trading is all about strategy: analyzing the market, making the right decisions at the right time… It’s a lot of information to take in, and technology can help humans navigate complex markets. This is precisely what trading bots do. In this article, we will explore how they work, how we design them at Napbots, and the value they can offer to busy crypto traders.
Trading Bots: When Algorithms Do the Work
Bots are autonomous programs that can interact with other users and interfaces on the web. The word comes from “robot”, which in turn was introduced by Czech writer Karel Čapek in 1920. “Robota” in the Slavic language means “forced labor”, and Čapek imagined a future where humanoid machines were working on behalf of humans.
Of course, online bots look nothing like humans, and they are not being forced to do anything. But the core idea has stayed the same, more than a hundred years after the first modern use of the term. Bots indeed perform actions for humans, without their creators having to intervene once they have been designed.
Bots can automate a variety of processes: scanning the web, answering customer service requests, posting on social media, or even taking control of a computer in the case of a hack. They are usually highly specialized programs, perfected to perform tasks automatically, drastically improving speed and guaranteeing impartiality of decision. As you guessed, this is extremely valued on financial markets: it is estimated that 86% of the crypto trading volume is performed by trading bots.
Crypto trading bots interact with trading platforms in order to buy or sell assets. They make automated decisions, based on an algorithm that was previously designed. This is why they are also called algorithmic trading bots. And since no human interaction is necessary once they are running, they operate much faster than a trader placing orders, without any emotion.
How Are Trading Bots Created?
Building a trading bot essentially means building an algorithm-backed strategy.
To make things simple, here are the three steps that our experts take when creating a bot.
- The first step is designing indicators. Quants define which market indicators the bot should monitor on selected underlying asset(s). These could be moving averages, trends’ slopes and strength… Several indicators are combined to create a more accurate vision of the market. A timing is also selected, as bots operate on specific trading frequencies (weekly, daily or even hourly). This is the core of the strategy.
- These indicators are turned into buy/sell signals once they hit a certain threshold. For instance, a trend-following bot will go long (buy assets) when it identifies a rise in prices and will go neutral (or short) when it identifies a fall in prices. Finally, a specific fund allocation is set for each buy/sell signal, depending on its strength and on the strategy typology: 100% of the funds, 50%…
Before their release on Napbots, strategies are systematically backtested. Backtesting means running the bot on historical data to see how well the strategy would have performed.
If the backtesting is satisfactory, the strategy is validated. Key performance indicators (KPIs) such as annual return and risk indicators (volatility, max drawdown) are associated with it to evaluate its run.
Napbots Crypto Trading Bots
At Napbots, we create our own, in-house bots trading on major crypto. Our strategies are divided in two main categories:
- Wise. These are long-only, uptrend-following bots. This means that they are designed to capture positive trends on a specific coin. Their market exposure is either positive, when the bots identify a potential uptrend, or neutral when it considers the momentum more bearish : the bot never short-sells. Short-selling is the practice of selling an asset without actually owning it. Wise trading bots operate on a daily or weekly frequency.
- Pulse. These are long/short strategies that trade both on the up and down trends, meaning they can buy or short-sell their underlying asset(s). They are designed to perform best in volatile markets with short term trends, as well as in bear periods. Some of them follow an hourly frequency while others trade on a daily basis.
On top of these two categories, two strategies combine several bots:
- Dynamic. This bot combines 13 different trading strategies, including AI and altcoins. Its main objective is to control volatility and reduce drawdown. It does so by dynamically allocating funds between AI & trend following strategies.
- AI. Leveraging machine learning algorithms, this strategy aims to predict the top-3 performing bots for the next 24 hours.
Why Should You Use a Crypto Trading Bot?
Napbots’ trading bots perform operations on your behalf. Once the bot is connected to your trading exchange, it does all the trading for you. All you have to do is check its results. But it’s not just about ease of use: following a strategy designed by experts also allows you to leverage their knowledge. Unlike humans that can make wrong decisions based on their emotions, bots stick to their rules. And thanks to back-testing, every strategy has been confronted with real market data.*
Finally, as previously stated, approximately 86% of the whole crypto trading volume is done by bots. We believe it’s time for individual traders to step up their game with easy, time-saving automation done by experts.
However, past performance is not always a good indicator for future results. Crypto markets are very volatile. Whether you are trading “on your own” or through a bot, your capital is always at risk. It’s important to keep this reality in mind when you are making transactions in crypto.
Moreover, “performance” is more than a number. To really grasp how your strategies are doing, you need to have a deeper look at the overall market, and especially the underlying asset. For example, if your strategy trades on ETH, you should check the price level fluctuation for this token over the same time period. This will indicate whether the strategy over or underperformed: the profit and loss (P&L) doesn’t mean much in isolation. Several other metrics such as Maximum Drawdown (MDD), and Win/Loss ratio are also of interest. We cover those in more detail in our dedicated article “Understand Your Crypto Strategy Performance.”
Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. Napbots is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance.
The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.