With all the allegations of Mt. However, using bots to trade on the financial markets is a long-established and legitimate activity — and it's easier than anywhere in the cryptocurrency markets. So, how do these bots work, and can they really make you money? Trading bots are software programs that talk directly to financial exchanges, and place buy and sell orders on your behalf. They make those decisions by watching the market's price movements, and reacting according to a set of predefined rules. Joseph Lee is living proof that they can make money. Lee, who derivatives exchange BTC. While that seems astonishing, the devil is in the detail, of course: a lot of that price increase stems from the massive price increase in bitcoin late last year. In fact, the real profits are far more marginal, he , so don't expect to install a plug-in and write your own rags-to-riches story. Market maker Lee's first trading bot used inter-exchange arbitrage, noticing differences in prices between orders on different exchanges, and buying on some exchanges while selling on others. Gox dominated the market, and other exchanges had poor pricing because their supply of bitcoins was limited. Gox and sold them to other markets. I bought a lot of bitcoin into tertiary markets. Established practice Lee may have written his own bots, but today, the bitcoin trading bot market is far more established, with several available off the shelf. Examples include , which offers an online trading bot accessed via a Google Chrome plug-in, and , which sells a Windows-based personal trading server. Trading by algorithm isn't new in the financial world: companies in the conventional financial markets have been using the method for years. Lee said, however, that the bitcoin exchange community is one of the first where exchanges grant customers' computers direct market access DMA. This enables individual traders to have their computer access the exchange's electronic order books directly. That's a service normally only available to brokers and investment houses in the conventional markets. So, why isn't everyone doing it? The situation — while still needing improvement — is at least a little better now. Opportunities for inter-exchange arbitrage still exist, but he recommends using technical analysis bots. But trading isn't necessarily based on technical analysis alone. It's difficult to program a computer to react to fundamental market conditions such as, say, rumours about the Chinese government taking a new stance on bitcoin, or the latest bitcoin-based black market trading site shutting down. Many bots will use an exponential moving average EMA as a starting point. These averages track market prices over a set time span, and bots can be programmed to react to what that price does — such as moving beyond certain thresholds. Those have the ability to respond faster then the EMA and their calculation is EMA-related, so it looks the same while it gives off better momentum. You're still going to have to come up with your own set of trading rules, if you're going to tell a bot how to make decisions. It's hard for a trader who's new to understand the market. These are typically combined to find buy and sell signals in the market, BTC or Bust told CoinDesk. A predictive algorithm might start buying as it expects the price will quickly rebound, while a reactive algorithm might start selling as it sees the price is dropping. Both types have their advantages and disadvantages — the challenge is to have the bot employ the correct strategy at the correct time. Even if lots of people use them, the theory goes that the different strategies they employ would stop them all moving the market in one direction and creating an artificial bubble — or worse, a ''. Not for everyone Is bot trading for you? On the other hand, if you don't have the financial smarts to put together a trading strategy, then bots could simply end up automating a set of poor market trading decisions. For many, then, who believe in bitcoin's long-term potential, the most basic trading strategy could be buy-and-hold. Whether or not you decide to automate your trades, the basic rules apply: don't trade more than you can afford to lose, and don't go into any investment without at least a basic understanding of what you're doing. Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.
