A trading bot is a program that connects to an exchange and makes trades on their behalf. Trading bots typically work using a number of signals and indicators e.g. indices, moving averages, relative strength indicator, etc. The idea behind the bots is to help users to make money on the respective markets without wasting too much of their time. In theory, bots should work better than most human traders because they are better at complex mathematical equations and they can compute these calculations extremely fast. However, the GIGO (Garbage in Garbage Out) rule of computing plays a huge role in the accuracy of bots and this explains why most traders end up losing money with the bots.
Research shows that mutual fund managers generally underperform. A review that was done by Standard & Poor realized that up to 94% of managed mutual funds generate lower profits over one and half decade as opposed to the S&P 500 index. This reinforces the common belief that most traders lose money on the markets while some few smart ones make a killing. While there is a lot of data on the performance of mutual funds, there is nothing much about trading bots.
Generally speaking, trading bots either outperform the market or sometimes perform just as good as the market. If this is true, then it would be strange that there is no data available that can be used to conclusively compare the success of trading bots. There might be two possible explanations for this. The first scenario would be the trading bot companies fear over promising anything because of the legal reprisals it might lead to. Secondly, maybe the bot companies want to keep their success secret in order to avoid losing the edge. Whatever the case may be, trading bots are here to stay and especially so in the crypto markets which never close on weekends or at night as the normal stock markets do.
Computers are great at arbitrage trading because they can detect differences in pricing pairs at lightning speed. They also have the ability to continuously scan through various trading pairs in order to detect such differences. This example alone shows how successful trading bots can be. As already pointed out, there is no silver bullet in trading bots. Just think of your favorite trading bot as a computer program that relies on human input. For instance, even though Ms. Power Point can be used to make amazing presentations, it doesn’t necessarily mean that any presentation made with it will be awesome. It all depends on the user. Similarly, if you are not good at trading, the bot will not suddenly make you great returns.
Traders should take precaution to avoid losing money when using bots. A good practice is to size in properly in the trades you make in order to manage the risk. One of the oldest pieces of advice is to not trade with money you cannot afford to lose. It is common practice for traders to only use a very small percentage of their account to place trades.