How to Pick a Crypto Trading Bot

August 2, 2021
6m
Read Time

Crypto trading bots come in all shapes and sizes. A variety of platforms exist and each offers unique sets of tools that allow you to completely automate your trading experience.

In this lesson, we will discuss the aspects you should consider before signing up for one of these services and entrusting your portfolio to be automated by a bot. There are many options to choose from, so examine your options wisely.

Here is a list of details that one should keep in mind while searching for the best platform.

Team Reputation

Above all else, the reputation of the team matters. Hacks have crippled unsuspecting users by leveraging clever vulnerabilities. One example is when hackers used trading APIs to pump the price of Syscoin on Binance. Hackers are clever, so the first line of defense is having a trusted founding team.

When evaluating the team, look for attributes that point to a reputable team. This includes points such as:

  • Where team members went to college.
  • What companies the members worked for.
  • How long the team has been working on the bot.
  • The reputation of members on their advisory board.
  • The funding source for the startup.
  • Country of incorporation.
  • The technical ability of the founding team.

Before placing our trust in a 3rd party development team to automate our strategies, use this list to gather information about the team behind the service.

Outside the specific members of the team, ensure that the company can be held accountable for any potential wrongdoing. The team needs to be transparent about their origin, their members, where they are based, and any other relevant information for us to understand if we can trust the team.

Automated Strategies

The next question we need to be asking ourselves is whether or not the bot we are evaluating actually implements the strategy we want to automate. Selecting a trading bot which only supports strategies that involve moving average cross-over, for example, is not useful if we want to rebalance our portfolio.

Glance over the website for the trading bot to make sure they support the strategies we want to implement for our portfolio. Check any configurations they offer or hints at the level of involvement it would require from an end-user. There is also no point in using a bot if it supports our strategy but ends up being more work than just having us manually implement the strategy.

Support

Our next important consideration is the level of support provided by the team. Does the team provide channels for reaching their development team to ask support questions or get help with bugs? If not, you might be left out to dry for weeks without getting answers to questions that are critical to your strategy. We have seen this happen countless times and we assure you that it is never an enjoyable experience.

Some ways we can identify if the team provides a great support experience is the following:

  • There is an active Telegram or Discord community where the team is online and answers questions.
  • Multiple channels offer diverse avenues to contact the team.
  • The support team answers questions promptly and actually works to resolve the problems.
  • Frequent updates are published to their discussion channels like Telegram and Discord.

These are just a few of the ways to determine the quality of support you will receive once you take the plunge and sign up.

Cost

Almost all services and products in the blockchain industry retain a high price, and trading bots are not different. While there do exist companies that offer economical and well-budgeted price packages, there still remain options that cost as high as thousands of dollars.

When choosing a platform, keep your budget in mind. Consider crypto trading bots as tools that can help you and not tools that can turn your life upside down. If you have freshly joined the crypto market, it would be wiser to spend your money on improving your portfolio rather than buying expensive trading services.

Ease of Use

The reality of the cryptocurrency market is most tools are overly complex in their design. This without a doubt applies to trading bots as well. Most trading bots are incredibly complicated. They have countless levers, options, configurations, and settings. Diving right into the deep end of this cold pool can take your breath away and leave you with a sense of dread.

Look for a bot that fits your comfort level. Instead of jumping right into open-source trading bots and trying to implement your own custom strategies by flexing your development skills, maybe take it slow at first. Experiment with a bot that only provides a few core features you want, but is easy to use. That way you can dip your toes into the pool, getting orientated before submerging yourself.

Backtesting

Backtesting is the way we simulate the performance of a strategy over historical data. It helps us understand the behavior of the strategy under certain conditions and can help us work towards understanding how the strategy might perform in the future. Of course, nothing is guaranteed, but this is the most robust way we have for evaluating strategies.

The bot we choose should most definitely have backtesting. We never recommend implementing a strategy if it hasn’t been backtested. Blindly venturing into the future can lead to disaster. Spend some time to evaluate the strategy, discover the best configurations, and implement the strategy in a way that aligns with your goals as well as the information you’ve been able to collect through the backtesting tool.

Caution! Do not trust any backtesting tool that uses CoinMarketCap data. This data source is unacceptable for evaluating trading strategies. Not only is this data highly inaccurate, but CoinMarketCap aggregates data across exchanges, so it’s not actual bid-ask data from exchanges. Only exact bid-ask data collected directly from each individual exchange should be used for backtesting strategies.

Implementation & Execution

Closely evaluate the implementation of the strategy to determine how the strategy will behave under varying conditions. Since every bot sports a unique implementation of a strategy, it’s important to understand the differences between each trading bots implementation. Not all implementations are treated equally. Look at aspects like the controls the bot has available, the configurations, and the robustness of the strategy under varying conditions.

At the same time, even if the trading bot supports the necessary controls to implement the strategy, that does not mean we are in the clear. Everything could look promising but still fall apart due to poor execution. The code and infrastructure built around the trading bot are important to manage the strategies. Failures due to server issues can cause incorrect trades, mistiming, and all-around poor strategy execution.

Losing funds due to poor strategy execution quickly becomes a nightmare. There is no getting your funds back, so prevent the problem by selecting a trading bot that is developing using sound software practices. Investigate the team’s openness to resolving issues, join their marketing channels to see the frequency of bug reports, and track how long it takes the team to resolve the issues.

This concludes an end to the current lesson. The next lesson explains how to build a crypto trading bot yourself and utilize the complex scripting abilities that most platforms offer.

Do keep in mind that this lesson requires an extensive understanding of coding. If you are a beginner trading interested solely in trying out a crypto trading bot but have no experience writing scripts, we recommend skipping the lesson.