How Crypto AI Trading Bot Work

How Crypto AI Trading Bot Work

Trading bot is not unfamiliar concept today, and for years, the bots have been helping people who do not have enough skill of trading or time. Using these bots is so simple that users may not know how to use them but make a profit daily. However, many newcomers think that these bots are not profitable. This sentence is said mainly by people who do not understand computers and algorithms and do not know how a bot works. If you know how a bot works, you probably won't be afraid to use these bots anymore. There are only a few rapid and logical steps left to understand. Stay tuned.

Does the Crypto AI Trading Bot Work?

If you set up the AI trading ​​bot correctly and the market conditions are appropriate, the AI ​​trading bot can be profitable. Proper situations are when cryptocurrencies fluctuate. Since crypto is a two-sided market, it does not matter if prices go up or down. Keeping prices or sharp zigzag fluctuations up and down for a short period can reduce the profit of an AI trading bot. The closer the market conditions are to ongoing volatility, the more significant profit you earn.

How Does an AI Trading Bot work?

An artificial intelligence bot is a set of codes that work away from humans. This code set is written for public use and has a graphical interface easy for non-experts to use in a few clicks. This code, sometimes called API, is connected to the exchange, so they use the exchange name for it. For example, a bot that can connect to your BitMEX exchange account is called a BitMEX AI trading bot. But AI trading bot is more complicated than that. Do you want to know how the BitMEX  AI trading bot works?


The 1st step: Create Dataset

The artificial intelligence bot must first find information to get started. These bots are usually attached to websites to detect proper cryptocurrencies for trading. For example, is one of these websites that introduce cryptocurrencies with the potential for profitability. Some bots work with only one asset (like bitcoin), while others identify the appropriate cryptocurrency using price action, technical analysis indicators (and sometimes fundamental data created by a human). It depends on the code.

In the next step, the bot creates tables called datasets. Datasets are lists of cryptocurrency information and different periods, prices, and other features. All the predictions that the bot will make are based on the analysis of this data. The more accurate and up-to-date this data is, the more profitable the bot.

The 2nd Step: Predict

Now, artificial intelligence comes into play. The variable that is intended to be predicted (dependent variable) is presented as an equation of known variables (independent variables). The dependent variable is the same as the predicted price. The independent variable is the same as the initial price, time frame, and technical analysis data such as moving average, RSI, or other indicators. Therefore, the final prediction depends only on the independent input variables and the solutions' equation.

Artificial intelligence algorithms remove noisy data and results. The result is then measured. The model will be fined in case of error (and loss). This process is called a train. At first, the data is randomly selected, but each time this code is repeated, it determines more accurate data and behaves more like a human. The training process is done many times to get the correct equation. This equation, of course, can never be ultimately achieved, but if this process is performed in large numbers and the noisy results are eliminated, the equation will work correctly with very little error approximation. This algorithm is known as linear regression. If the obtained equation is nonlinear, the AI ​​trading bot must be equipped with a neural network prediction method.

Some AI trading bots use more complex algorithms, such as Gradient Boosting, which initially creates a random forest of "weak" decision trees and removes data that interferes with decision making. This process speeds up finding the solution. Of course, you do not see the process, and it happened in the background.

The 3rd Step- Stop-loss and Risk/Reward Ratio

Once the artificial intelligence trading bot can find an equation with a low error rate, it must use other data to determine the levels of risk to reward and stop-loss correctly. For example, daily trading volume, market cap, or fluctuations in previous time frames affect finding proper stop-loss. This step usually no longer requires artificial intelligence, but highly advanced AI trading bots may again use linear regression to determine stop-loss. Some bots can set the stop-loss manually, and you can select any number you desire, but keep in mind that the success rate of the trade in this situation depends on your skill in determining the stop-loss.

Step 4: Connect to an Exchange Like BitMEX or Binance

Now that all the steps are done, You should connect the AI trading bot to the exchange to buy and sell on your behalf. Best exchanges such as BitMEX or Binance Futures can join bots for buying and selling. When the bot selects the preferred crypto, makes a purchase prediction (signal), and determines the stop loss, it connects to the exchange and makes a long or short order. The exchange executes the order.

Artificial intelligence bot work is not over. These codes are designed so that the more they work, the better the results will be, and they are always looking to improve their win-trade. It is done automatically, and you do not need to have programming skills to use the bot. Of course, connecting the bot to the exchange must be done manually. If you do not intend to buy and sell automatically, you can do it manually. It is not essential to connect the bot to exchange. However, if you keep the bot on, it will still be helpful for you because you can use the AI trading ​​bot as an assistant to receive the buy and sell signal. What more do you want?