How To Make A Trading Bot? A Step By Step Guide

1. Step 1: In what market should you trade?
2. Step 2: Develop a trading strategy
3. Step 3: Create the trading bot
4. Step 4: Backtest: Test the historical performance
5. Step 5: Demo the trading bot live: does it execute the trades as expected
6. Step 6: Deploy the trading bot and monitor it’s performance
7. Conclusion

Key takeaways:

• A trading robot is a piece of computer code that can execute buy and sell orders for you.
• Determine what market you want to trade in: Forex, crypto, commodities, indices or stocks. We advise you to start in the indices market.
• A profitable trading robot has a trading strategy with a high probability of financial success in order to be lucrative. Backtesting can determine you chances of succes.
• Metatrader is the best software to start your automated trading journey. You can code a bot yourself or use tooling such as tradingbotgenerator.com to create a trading bot for you. Try the FREE demo and create your first trading robot in minutes!

What is a trading bot?

An algorithmic trading robot is essentially a piece of computer code that can create and carry out buy and sell orders in financial markets. The trading strategy is the key element of a trading robot. The trading strategy specifies the entry rules that indicate when to buy or sell. The exit rules specify when to end the open position. Moreover, most trading bots have rules that specify the position size to purchase or sell for. Read more about what trading robots are and what they can help you with.

Step 1: In what market should you trade?

What markets are there?

• Indices
• Forex
• Cryptocurrencies
• Commodities
• Stocks

Indices

A market index tracks the performance of a certain group of stocks, bonds, or other investments. The most well-known index is the S&P 500. The S&P tracks the stock performance of the 500 largest companies listed on stock exchanges in the United States. It is the most-followed index. There are many more indices available. They are often grouped by a particular industry, like tech stocks or emerging markets.

You can trade an index like a regular stock, Open a short (sell) position if you think the index will fall; or open a long (buy) position if you think the index will rise.

Forex

Foreign exchange, or Forex, can be defined as a network of buyers and sellers who exchange currencies at a set rate. If you have ever been abroad, you have probably engaged in some type of forex transaction. It is the process through which people, businesses, and central banks convert one currency into another.

While a lot of currency conversion is done for practical reasons, the great majority is done with the intention of making a profit. Some currencies' price swings might be particularly erratic due to the volume of currency that is converted each day. This volatility, which increases both the danger and the potential for huge returns, is what can make forex trading so alluring to traders.

Currencies are listed as three-letter codes. For instance, the currency pair GBP/USD entails purchasing the British pound and selling the US dollar. The base currency in the example below is GBP, while the quote currency is USD. A pound is worth 1.35361 dollars if the GBP/USD exchange rate is 1.35361. The price of the pair will climb if the value of the pound relative to the dollar rises, making one pound worth more dollars. The price of the pair will fall if it the value of the pound relative to the dollar falls. Therefore, you can buy the pair if you believe that the base currency in a pair will likely strengthen versus the quote currency (going long). Sell the if you believe it will lose strength. And most importantly make money based on these trades.

Cryptocurrencies

Work in the same way as the forex market. The only difference is that the currency traded is a cryptocurrency.

Commodities

Commodities, such as agricultural goods, mineral ores, and fossil fuels, are raw materials that are utilized to make completed products. Contrary to securities like stocks and bonds, which only exist as financial contracts, commodities are tangible objects that are bought, sold, and traded on financial markets.

Four major categories of commodities exist:

• Energy: The market for energy includes uranium as well as oil, natural gas, coal, and ethanol. Renewable energy sources like solar and wind power are also included in the term "energy."
• Metals: Commodity metals include industrial metals like iron ore, tin, copper, aluminum, and zinc as well as precious metals like gold, silver, palladium, and platinum.
• Agricultural products: Agriculture includes non-edible products like cotton, palm oil, and rubber as well as food ones like cacao, corn, sugar, and wheat.
• Livestock: Livestock includes all live animals, such as cattle and hogs.

The exchange of various assets, often futures contracts, depending on the value of an underlying physical commodity is known as commodity trading. Investors place wagers on the anticipated future value of a certain commodity by buying or selling these futures contracts. They purchase specific futures or go long if they believe the price of a commodity will increase. And they sell other futures or go short if they believe the price of the commodity will decrease.

What is the best market to trade with a bot?

For the beginners out there I think creating a strategy on cryptocurrency is relatively simple, followed by indices, commodites and lastly forex.

1. Indices are the best market to start your automated trading journey in. Because so many trades are being made each second of the day and the market is less volatile, you can create a lot of different strategies. You can create a bot that trades every day small win margins, or you can create a trading bot that trades less often but with higher win margins. See step 2 for more information. Moreover, the spread, which is the difference between the bid and ask price is incredibly small. This increases your chances of being profitable.
2. Because a lot of cryptocurrencies are still being traded manually, a trading bot will give you a significant advantage. However crypto assets do have their downsides: The volatility is high, the spread is ussualy large, and the recent drop in Bitcoin's price makes it less favorable.
3. With commodities, there is a slight increase in volatility and thus a bigger profit potential. But this also makes it more difficult to develop a profitable strategy.
4. Creating profitable strategies based on the continuous minor swings of the forex market is the most complex. I currently have one strategy that might be able to profit in the forex market but am currently still putting it to the test, while I already have two strategies bitcoin, four for indices, and one for commodities.

Step 2: Develop a trading strategy

All trading strategies can be divided into two types. Trend following strategies and mean reversion strategies. When I made this discovery my understanding of trading strategies improved greatly. Moreover, this discovery also increased my ability to improve and create new strategies. I hope you will experience this as well.

Trend following strategies

The basic assumption of trend-following strategies is that most profit in the market is made when the market makes a big move and the profits made during these times are larger than when the market is stagnant or makes small moves. This assumption has implications for the typical performance. For example a trend following strategy loses more trades than it wins, because the market only makes big moves a small portion of the time. Typically most trend-following strategies only win 30% of the trades. However, when a big move occurs they will hit a homerun. Therefore these strategies often have a large profit factor. The profit factor is determined by dividing the average winning trade by the average losing trade. The profit factor and the percentage of trades the strategy wins are two key principles you will need to understand. Based on these two metrics we can determine whether a strategy is profitable or not.

Mean reversion strategies

The basic assumption of mean reversion strategies is that the true price of a security is the mean. Another word for the mean is the average. Mean reversion strategies assume that when the price is above or below the mean, the price will revert back to the mean. These strategies are also called counter-trend trading strategies. These assumptions have implications for the typical performance. For example, mean reversion strategies typically win more trades than they lose, they usually win 70% of the trades. Because the price movements are small these strategies have small profit factors. The average win is sometimes equal to or smaller than the average loss. With a small profit factor you need to win more trades to be profitable. The biggest downside of these strategies is that they suffer a massive loss when the market makes a big move. I advise you to make a lot of trades and keep your positions for a short period. Moreover, be careful when sizing your positions. It is also possible to trade with a stoploss. When the trade moves against you because the market is experiencing a big move, your stoploss will prevent you from losing more money.

Advise

In contrast with many trading quants, I am a strong advocate of developing a trading strategy based on one security instead of a whole range of securities. Instead, focus on one security and create the best strategy possible. In my experience, market conditions vary a lot, which makes it a nearly impossible task to create a trading strategy so robust it can be successfully traded on several securities. As an example, a trading strategy that works for all the forex pairs is an illusion, but a strategy that works for EUR/USD is feasible. I therefore advise you to create a strategy for one security.

Step 3: Create the trading bot

To create a trading robot you have several options:

• Code a trading bot yourself
• You can use a tool to generate a trading bot for you
• Hire a developer to code a bot for you

Several software packages provide software to develop trading bots. I’ve tested many different software providers, such as MetaTrader, Quantopian, Backtrader, and Tradestation. My favorite trading bot software is MetaTrader. It is incredibly easy to put a trading bot to use. Moreover, the stability of their trading robots is amazing.

The only downside all platforms share is their steep learning curve to create the trading bot. The code you need to write to create a bot is hard. This is why we created the Trading Bot Generator. You determine the trading rules, and we generate all the hard code. We believe that creating a trading bot should be simple and available to everyone. With our help, you can create an unlimited amount of trading robots. Try the demo and create your first trading robot, or register & subscribe and get access to over 20 indicators to create a trading robot tailored to your custom trading rules.

Step 4: Backtest: Test the historical performance

Backtesting aims to predict how well a trading strategy will perform in the future by calculating how well it would have performed in the past. According to the underlying idea, any strategy that performed well in the past is likely to do so again in the future, and vice versa, any approach that did not do well in the past is also likely to do so again in the future. Read our backtest checklist here.

Typically, large institutions were the only ones able to do backtesting, but with the abundance of quality data, it is now possible for retail traders to backtest their trading strategies.

Although MetaTrader offers good backtest functionality, I usually also backtest my trading bot with Tradingview. Tradingview offers much more data than the other software packages. when we, for instance, compare Metatrader and Tradingview data on a 4-hour timeframe on the SPX500USD. TradingView offers five years of data, while MetaTrader offers only two years of data. The amount of available data is crucial for developing profitable strategies. Moreover, Tradingview also charts the trades that would have been taken. Allowing you to figure out under which conditions your strategy works and when it does not. This is very useful for developing strategies, and I’ve generated a lot of new ones based on these insights.

Moreover, Tradingview allows you to switch between securities easily, and you will see your backtest results instantaneously. A strategy I developed didn’t work for the S&P 500 but did work for EUR/USD.

Step 5: Demo the trading bot live: does it execute the trades as expected

This is the mistake I have made, and it has cost me a lot! Especially because I combined it with curve fitting and repainting. My trading strategy, therefore, performed differently live than in the backtested results. In a month, I lost 2000 dollars of the 5000 dollars I invested, which was a lot of money for me. I needed to learn this lesson the hard way, and I hope you won’t do the same. I advise you to test your strategy for at least 3 months with a demo account. Many traders like myself, however, are too eager and think it is not needed. The question I asked myself was, "What if it works and I could have made a lot of money?" This however, is the wrong question to ask. It is much more costly to lose your hard-earned money. Previously, you probably didn’t trade profitably so there is no cost of waiting. I therefore advise you to start with a demo account or with a very small amount of money. The amount of money should be so small that you would be comfortable throwing it away now.

Step 6: Deploy the trading bot and monitor it’s performance

When I just started, I wanted to save money, so I used a Raspberry Pi to trade. However soon my internet connection was down, another moment the electricity was down, and another moment someone in my family pulled out the adapter. All these circumstances result in downtime in which my MetaTrader trading robot was not able to trade. This can be very costly, especially when you don’t notice it happening. I, therefore, recommend you use a virtual private server. MetaTrader offers a VPS service within its platform. The virtual hosting provides round-the-clock operation of the client terminal. This is very convenient if you use trading robots. The virtual hosting service allows your trades to be executed at any time with minimum delay!

Conclusion

You have discovered how to make a trading bot. It is a simple step-by-step process, and a trading robot is nothing spectacular. It is just a piece of computer code that can execute entry and exit orders as well as spot buy and sell opportunities. Before it can execute trades, you will need to develop a trading strategy that the trading robot can use. Moreover, you need to choose a market to deploy your trading robot. In our opinion, the best market to start your trading journey in is the indices market.

To develop the trading bot, we advise you to use MetaTrader. a platform used by millions of traders because it is easy to deploy trading bots and they offer a very stable service. You can write the trading bot code yourself. Or you can use a tool such as the TradingBot Generator to create the hard code for you. When you have the trading bot, be sure to backtest your trading strategies' performance. And deploy your trading bot with a demo account before you deploy it with your hard-earned money. We wish you well on your automated trading journey!

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With the help of the Trading Bot Generator, you can create your first expert advisor in minutes, without writing any code. In my opinion, creating a trading bot should be possible for everyone. The only thing a trader should care about is the trading strategy. This is in my opinion the hardest part. Remember that this also applies to manual trading. When you trade by hand you also need a profitable strategy. So in my opinion creating an automated strategy is the best thing to do.

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