Automated trading is one of the backbones of the modern financial system. Also known as algorithmic trading, automated trading was conceptualized in the 1950s by Richard Donchian in a traditional stock market exchange, later re-invented in the 80s and 90s as software to fit technological advancements. Betterment was the first zero-supervision option for consumers.
What is a trading bot?
Automated trading essentially uses a computer program to create orders to buy or sell assets on a market and submit them automatically in an exchange. To control these orders, trading software is programmed to follow preset rules, usually adjusted by the analyst in control.
In traditional risk management solutions like BlackRock’s Aladdin, that analyst was a fund manager operating out of Wall Street. These days, trading bots are available on a domestic level, programmed to fit your risk tolerance by international talent for any number of markets.
Automated Trading and Crypto
Cryptocurrency is one of the more recent markets where rule-based trading has found success Despite wide scale support, there is a need for caution as crypto bots are still highly unregulated. Review websites that vet and advise on the best crypto trading bots are imperative before use.
Unlike stocks, bonds and other tradable assets, crypto is unique in its ability to be bought fractionally. Instead of selling a certain fixed share amount, even the smallest quantity of crypto can be purchased and sold to realign the profits and losses of a given portfolio.
The parameters of an automated trading bot are one definite change in the shift from stocks to cryptocurrencies. Parameters are the guidelines that trading bots follow to make trades.
These trading rules are based on statistical market values, the cold mathematical input that software regurgitates into a command. Parameters are coded into the bot based on your preferences in risk tolerance or other personalizations, such as investing in one coin vs another.
Automated trading, the actual practice, takes place remotely on servers that operate remotely thousands of miles away from your device. As such, there is a lot of technical security thanks to the team of engineers backing the software, however, glitches and bugs are always possible.
The inner workings of a crypto bot depend on how it was created. The more complex bots are developed from the ground up by software engineers and run on complex internal architecture, involving machine learning, artificial intelligence and mathematical modeling.
The next most important aspect of any crypto trading bot is undoubtedly the method of trading. Market-making, arbitrage and trend following are all different methods aimed to please a certain niche. This can be anything from generating the most profit possible despite a higher risk to maintaining the capital you invested in crypto and generating small profits where it is viable.
The future and YOU
Automated trading is a constantly-evolving set of financial technology which will likely continue developing far into the future. Before making any sort of investment whatsoever, it is of the highest importance to do your own research on a financial product.
This will ensure that you won’t get swindled out of your money. And in a novel market environment like automated trading, getting swindled is as easy as installing the wrong type of bot and leaving the software to run unsupervised for too long, leading to a deficit in your balance even though the crypto market is rising fast.