Benefits of Trading Bots

By on September 6, 2018

Today it is possible to find many types of bots for trading including arbitrage bots which can capitalize difference in price across the exchange. For example the price of Bitcoin may change from exchange to exchange. This is where trading bots will come for help. They help traders implementing different types of marketing strategies as well. Some of these strategies are

  • Arbitrage
  • Market making
  • Trend trading
  • Mean reversion
  • Index fund rebalancing
  • Strategies based on mathematical models
  • Volume Weighted Average Price
  • Time Weighted Average Price

Let’s look into some these strategies in detail.

In Arbitrage trading strategy, trader takes advantage of price difference that exists between two crypto currency exchanges. In this strategy, the trader purchases one digital asset during one exchange and he will sell this in next exchange. In earlier days this was best strategy which is commonly followed and was really effective. This was because earlier there used to be large price difference present on varying exchanges.

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Even for market making strategy, trading bots are really useful. This is because here there will be continuous selling and buying on many spot digital currencies. In this strategy one must place limit orders, around digital asset’s current market price. This will happen on both the sides of order book. Trader will be able to make profit from resulting spread since there will be fluctuations in the price of the digital asset.

Trends of digital asset can also be identified using crypto trading bot. They can also be used to buy and sell orders. This makes them very effective for even trend trading. This trend trading is one such strategy that help in capturing gains through analyzing the asset’s momentum for a given direction.

Mean reversion trading strategy works on assumption that there will always be a stable trend in price of every given asset. There is also an assumption that price of that given asset fluctuates around that trend. This will slowly revert towards average or mean. This average can be historical average of that price or even be the return of that asset.

Let’s understand index fund rebalancing. These index funds always have defined periods for rebalancing in bringing holdings par with benchmark indices. This can create very profitable opportunities mainly for algorithmic traders. These trades are usually initiated through algorithmic trading systems mainly for best prices and timely executions.

Mathematical model based strategies are based on proved mathematical models. For example delta neutral strategy, this allows to trading on underlying security and combination of options.

Next one, volume weighted average price strategy works by breaking large orders and releasing small chunks which are dynamically determined. This uses historical volume which is stock specific profiles. The main aim of this strategy is to execute order close to volume weighted average price or VMAP.

Even this strategy breaks up large orders and can release smaller chunks which are dynamically determined. This used divided time slots which are even and between end and start time. Here the aim is to execute order close to average price which is between start and end time and hence minimize the market impact.

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