Everyone can automate trades through 3rd-party platforms, but do you know how to build a crypto trading bot and do it on your own? Most people rely on closed-source software for bot trading, but if you’re tired of needless security attack vectors and limitations, you might want to look elsewhere.
A crypto trading bot can save plenty of time and execute trades better and faster than humans. They’re great for avoiding redundant tasks and trading while you’re asleep. Moreover, you can learn more about trading markets by using bots. Here is a step-by-step guide that explains how to build your own crypto trading bot.
What is a Crypto Trading Bot?
A crypto trading bot is a program that follows a predetermined algorithm and automatically executes trades. Most trading bots surpass human traders in terms of accuracy, speed, and complexity. Due to the highly competitive nature of crypto trading, it pays to automate trades.
After trading Bitcoin for a few nights in a row and wondering where it all went wrong, I realized that something was wrong. I caught whales moving the market after each daily close. If Bitcoin moved up, they’d sell. And if Bitcoin moved down, they’d buy. Whales knew that the daily close mattered to technical analysts, so they did everything to manipulate it.
The daily close occurred at 3 AM in my timezone. I wasn’t a fan of setting an alarm just to observe the market and open a trade – you can’t buy a good night of sleep with money. But knowing that I had an edge over the market, it hurt to miss the opportunity, so I decided to code my own bot.
The bot I created would buy or sell depending on which direction most volume went during the 3 AM period. I’d ride the wave expecting whales to apply enough pressure to convince retail that the market was bullish or bearish. I made thousands of dollars each night that week just by creating this trading bot.
Trading bots save time, help you with repetitive tasks, and execute those split second trading opportunities that you always seem to miss. The advantages that bots offer are worth the hours you’ll spend developing them.
Read the advantages of running your own crypto trading bots
Trading Bot Platforms or Custom Trading Bots?
There are numerous trading bot platforms online, which means you don’t have to code your own bot if you lack the experience. They allow you to manage portfolios, execute trades, and copy other traders with minimal input. So if these tools are at your disposal, why create your own?
Trading bots aren’t free. Most charge a monthly subscription – which ranges from $15 to $700 depending on the package. Moreover, not every platform has everything you need. One excels in arbitrage trading while another one beats everyone else at portfolio rebalancing. You can save money plus add every feature you need by coding your own.
Security issues and server stability represent another set of problems. Can you trust a platform to manage your money and execute trades? Maybe they have an unknown security vulnerability, or their network is too unstable to execute every trade with the same accuracy. And what if the bot opens a position, goes offline, and then forgets to take profit or close the position?
You can trust trading bot platforms. Most work flawlessly and have a great reputation. But the question I have for you is: can you afford to suffer a loss if you’re liquidated due to server problems? The risk is always there – this includes everything in trading. It’s up to you to decide whether you want to take the risk.
But on the other hand, creating your own crypto trading bot is tedious work. You may not have the capacity to build all the features. And if you do, you have to apply extra due diligence to confirm the bot works. The choice is obvious if you know the limitations of your development skills.
Types of Crypto Trading Bot Strategies
A crypto trading bot can do whatever you desire. You can apply complex technical analysis strategies, force the bot to follow indicators, or simply tell it to buy certain assets on a periodic basis. However, investors typically use three popular strategies:
- Portfolio rebalancing
- Market making
Arbitrage bots hunt down price differences between cryptocurrencies by buying and selling on multiple exchanges. Although the profits are small, you can repeat the strategy for a relatively long time before the arbitrage opportunity disappears. For example, the bot can buy Ethereum on FTX – where the price could be 0.5% lower than the market average – and sell it on Binance.
Portfolio rebalancing bots periodically adjust a portfolio’s asset allocations. If an asset rises significantly, it becomes dominant in terms of dollar value. This ruins your original allocations – which should be balanced. Bots will rebalance your portfolio by selling the highest performing asset and using the funds to purchase the other assets you own. Doing so ensures that you take profits and reinvest into assets that haven’t moved yet.
Market Making bots profit on the discrepancy found in order books. They trade the spread and provide liquidity to both sides of the market. Market making is like arbitrage trading, but on a much smaller scale. However, this strategy is still popular because it generates sizable profits when traded with high volume.
Build a Crypto Trading Bot: Step-by-Step Guide
You now know enough about automated trading to use an online crypto trading bot platform. But if you feel brave enough, read the step-by-step guide below to learn how to plan everything out and build your own crypto trading bot.
1. Pick a Programming Language
Keep in mind that you’re trading with real money. You can’t afford to code bugs into your bot. You’ll lose money even with a great strategy because the bot will fail to follow the original plan. I recommend hiring a dev or studying the language extensively before starting to develop.
2. Choose a Trading Strategy
You can’t build a bot without first knowing the algorithm that it will follow. There’s no time to waste and you don’t want to write a bot that you’ll have to remodel. Complex trading models require time to develop, so plan ahead.
Earlier I mentioned arbitrage, rebalancing, and market making as a few popular bot strategies. I recommend checking out this Binance arbitrage monitor if you want to see an example of a functional model. There’s also a Github page for a full-on crypto arbitrage trading bot if you need more inspiration.
You can study the following git page to learn more about Dollar Cost Averaging (DCA) bots. Alternatively, visit GitPlanet to find thousands of open-source projects.
3. Establish a Desired Bot Architecture
Determining your bot’s architecture and trading model is the next step. You need to build a solid mathematical model from which your bot will draw its efficacy. You’ll also need to program the bot so that it utilizes the right data. Some bots may require the ability to analyze market inefficiencies, multiple data sets, and a few years worth of historical price data.
Note that a bad model can lead to heavy losses. Even if you input the correct data, a faulty algorithm will produce an undesirable output. You don’t want a crypto trading bot that spots the perfect buying opportunity but instead decides to sell.
4. Code the Bot
Here comes the most important part: coding. Once you know the model, strategy, and language, it’s time to code your own crypto trading bot. This will be a time-consuming process. However, you can reduce development time by consulting various github pages or hiring developers to help you.
5. Backtest the Bot
After creating the bot you’ll have to test it. The bot might not work properly or it might require optimization, hence why you’ll want to deploy it in a test environment. You might also need to swap your existing data set for a better one, or compare the performance between trading on different exchanges.
After you backtest and solve all the bugs, it’s time to backtest again. You want to optimize your bot, so that it performs in the best possible way. Trading is all about reducing risk, so prepare to backtest and finetune your bots for days before letting it loose.
Make sure to apply these 5 crucial crypto backtesting tips
6. Collect Exchange API Keys
After backtesting and comparing the performance of your bot on different exchanges, you need to collect API keys. Select the exchange that performed the best, log into your account, and find the API keys so that you can connect your bot with your trading account.
Traders use API keys to have their bot communicate with exchanges. It’s a piece of information that authenticates your ownership over the exchange account. It’s like using an email and password – but much safer.
Most exchanges allow you to customize your API key by deciding whether the bot will have permission to transfer, withdraw, or trade assets. You’ll only want to trade assets (unless arbitraging), so make sure to exclusively enable trading for extra security.
7. Deploy & Use the Bot
You’re finally done. With a functional trading bot now connected to an exchange, you can deploy the bot and trade with real money. Make sure to backtest one last time before using the bot. You will need to optimize your bot regularly, so you better get used to coding for as long as you want to remain profitable.
I also recommend trading small capital before trading big sums. Even a backtested strategy that performs well in historical settings can lose you money. Just because a strategy worked in the past doesn’t mean it will work well in the future. That doesn’t mean your bot will be unprofitable, but that you should take extra care with automated trading.
Is Building Your Own Crypto Trading Bot Worth It?
Developing a crypto trading bot takes a lot of work. And it won’t be free if you lack the experience or knowledge to build one. Apart from time, you’ll also have to spend money on a good development team to make your bot-trading dreams come true. Knowing how many resources one needs to spend, you might have second thoughts about coding a trading bot.
I believe that developing a bot is worth it in the long-run. Once you know how to build a crypto trading bot, you’ve gained valuable experience and insight into how the market works. You’ll save valuable time by automating trading strategies – which leaves you with extra room for exploring more cryptocurrencies or sleeping.
All you’ll have to do is optimize existing trading strategies once you have set up a trading bot. The best thing about this is that you’ll learn even more about technical analysis through optimization and constant reiteration.
But if you’re not motivated, the next best thing is to use an online crypto trading bot platform. I personally recommend Shrimpy due to its excellent collection of features. You can rebalance portfolios, DCA, create indexes, and swap tokens – all while trading on more than 17 exchanges.
If you want to learn more about crypto trading bots, I recommend reading the following articles: