Articles related to algorithmic trading software development and trading platforms aiding automated investment operations.
How to use Sharpe Ratio?
The Sharpe Ratio is a well-known measure of portfolio performance. It is a ratio that allows for the comparison of various portfolios and allows for the measurement of their profitability. The mathematical definition is described as a division between the expected rate of return subtracted by the risk-free rate of return and the standard deviation of rates of return [6].
In practice, the ratio is calculated annually:
The ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset ([1]). In simple words, the higher Sharpe Ratio is, the more portfolio is profitable.
Why is the Sharpe ratio so popular?
Most traders are still using the Sharpe Ratio because of its simplicity and ease of interpretation. It was proposed by Sharpe in 1966 and became credible to most users due to Nobel Prize in Economics for his works on the Capital Asset Pricing Model ([5]).
Properties of the Sharpe Ratio
With reference to [1], the ratio has several properties. It is immune to manipulation by leverage. It can be interpreted as a T-statistics to test the hypothesis (see [8]) that the return on the portfolio is equal to the risk-free rate of return. The higher ratio is consistent with a higher probability that the portfolio return will exceed the risk-free return. The investor using the ratio has a utility (see [7]) whose only arguments are expectation and variance of returns.
Forgotten assumptions
Unfortunately, most traders forget that the Sharpe Ratio doesn’t apply to every data set. The central assumption of the ratio is that the distribution of the returns is normal. The financial market should be frictionless (without financial costs), and the risk-free rate of return should be constant and identical for lending and borrowing. Also, data used for computation should contain the initial capital of the portfolio.
Consequences of the ratio
Even though it is really hard to obtain the normality of returns on every possible data, the Sharpe Ratio has other disadvantages, which are represented in [1].
The ratio does not quantify the value added, and it’s only a ranking criterion. It has a hard interpretation when the value is negative. The Sharpe ratio does not make any distinction between upside risk and downside risk.
In the case of aggregation of portfolios, the correlation between volatilities is not included in the ratio. It is suitable for investors who invest in only one fund.
It doesn’t refer to a benchmark. The choice of a risk-free rate is rather important, though the impact is weak. The result highly depends on the initial capital of the portfolio.
The sampling error of standard deviation is embedded in the values of the ratio. By using the standard deviation of returns, the Sharpe measure puts both positive and negative variations from the average on the same level. But most investors are only afraid of negative variations.
As a consequence, the Sharpe Ratio leads to inappropriate results on particular sets of data.
When the ratio fails
To be aware of how important the assumptions are, consider the following example [*]:
When the expected return is negative, the Sharpe Ratio gives the inappropriate answer. The Sharpe Ratio from Instrument A should be greater than that from Instrument B.
| INVESTMENT A | SHARPE RATIO | |||
| TOTAL RETURN | -10.00% | -1.5 | ||
| RISK-FREE RATE | 5.00% | NUMERATOR | -15.00% | |
| STANDARD DEVIATION | 10.00% | DENOMINATOR | 10.00% | |
| INVESTMENT B | SHARPE RATIO | |||
| TOTAL RETURN | -10.00% | -0.92 | ||
| RISK-FREE RATE | 5.00% | NUMERATOR | -15.00% | |
| STANDARD DEVIATION | 16.25% | DENOMINATOR | 16.25% |
The solution to Negative Returns
In the case of negative returns, the Israelsen modification of a Sharpe Ratio gives appropriate results. This ratio could be used as a verifying measure of a standard Sharpe Ratio (the values are meaningless, but the order remains accurate).
The Israelsen modification of the Sharpe Ratio from a previous example provides that Instrument A is greater than the Sharpe Ratio from Instrument B.
| INVESTMENT A | SHARPE RATIO ISRAELSEN | |||
| TOTAL RETURN | -10.00% | -0.015 | ||
| RISK-FREE RATE | 5.00% | NUMERATOR | -15.00% | |
| STANDARD DEVIATION | 10.00% | DENOMINATOR | 10.00% | |
| INVESTMENT B | SHARPE RATIO ISRAELSEN | |||
| TOTAL RETURN | -10.00% | -0.024 | ||
| RISK-FREE RATE | 5.00% | NUMERATOR | -15.00% | |
| STANDARD DEVIATION | 16.25% | DENOMINATOR | 16.25% |
In conclusion, when negative returns occur, the investor should also check the value of the Israelsen modification before making the decision.
Avoiding invalid distribution
The most dangerous ratio usage is when the distribution of the returns isn’t normal. It seems that the best idea is to check the normality of the returns before use of the Sharpe Ratio. Several statistical tests can validate data distribution, such as Shapiro Wilk, Anderson Darling, Cramer von Misses, Dagostino Pearson, Jarque Berra, Kolmogorov Smirnov, Kolmogorov Lilliefors, Shapiro Francia (see [9]).
Generalizing Sharpe Ratio
On the other hand, there are different extensions of the Sharpe Ratio, which gives more accurate results by extending different assumptions. There are plenty of them described in [1], but only those with skewness and kurtosis will be presented.
Skewness describes the asymmetry of the probability distribution. If there are more extreme returns extending to the right tail of a distribution, it is said to be positively skewed, and if they are more returns extending to the left, it is said to be negatively skewed [2].
Kurtosis provides additional information about the shape of a return distribution. Formally it measures the weight of returns in the tails of the distribution relative to standard deviation but is more often associated with a measure of flatness or peakedness of the return distribution [2].
Skewness and Kurtosis are normalized forms of 3rd and 4th central moments, respectively (see [10]). Its combination with the Sharpe Ratio allows for approximating the ratio when the distribution is not normal. This method leads to the proposition from [4], where skewness divided by kurtosis is added to the Sharpe Ratio, which results in a new performance measure.
In the case when the owner of the portfolio has different preferences (different utility – see [7]), there are other ratios to measure the performance. The Adjusted for Skewness Sharpe Ratio allows measuring the performance using hyperbolic absolute risk aversion (HARA), constant relative risk aversion (CARA), or constant absolute risk aversion (CRRA). More details can be found in [3].
Conclusion
The Sharpe Ratio is a standard measure of portfolio performance. Due to its simplicity and ease of interpretation, it is one of the most popular indexes. Unfortunately, most users forget the assumptions and that results in an inappropriate outcome. They should consider checking the distribution of the returns or validating the results with other performance measures before making a decision on the market.
References
[1] Cogneau P., Hübner G., The 101 ways to measure portfolio performance, Université de Liège
[2] Bacon C., How Sharp is The Sharpe Ratio? – Risk-Adjusted Performance Measures, StatPro Group
[3] Zakamouline V., Koekebakker S., Portfolio Performance Evaluation with Generalized
Sharpe Ratios: Beyond the Mean and Variance, University of Agder, 2008
[4] Watanabe Y., Is Sharpe Ratio Still Effective?, Journal of Performance Measurement, 2006
[*] The original example is taken from the site:
[5] http://www.investopedia.com/articles/07/sharpe_ratio.asp
[6] https://en.wikipedia.org/wiki/Sharpe_ratio
[7] https://en.wikipedia.org/wiki/Utility
[8] https://en.wikipedia.org/wiki/Statistical_hypothesis_testing
[9] https://en.wikipedia.org/wiki/Normality_test
[10] https://en.wikipedia.org/wiki/Central_moment
Crypto Signals
From Crypto Signals to Profitability: the Path of a Crypto Investor.
How do you move from earning scraps off the crypto market to profitability? Like most crypto investors, you’ve had to or are probably still pursuing different paths to profitability. You’ve often asked yourself what it takes to succeed as a cryptocurrency investor. You’ve researched the different trade strategies, explored technical analyses, tried social trading, and even went after crypto signal providers. But none of these have what it takes to turn you into a profitable crypto investor.
In this guide, we detail the average crypto trader’s journey to profitability. We take you through the different stages most investors have to go through before they can eventually turn profitable. Almost always, it starts with manual trading crypto signals and social trading for crypto trading newbies before turning to automated systems. We explore this crypto evolution, detailing the different stages at which most crypto investors are currently stuck in before letting you in on the ultimate crypto investment strategy.
Crypto Evolution
An investor’s crypto evolution is the journey they have taken in pursuit of profitability. It’s more of a learning curve with a common starting point where most crypto traders begin their investment journey. In most instances, traders start by interacting with such manual trading strategies as crypto signals. Others opt for the fully-automated crypto trading bots that are synonymous with the promise of massive returns.
Soon, they will shift to the more flexible DIY crypto trading bots that allow them to tweak the trade settings. But all these have serious faults that either cause traders to lose their investments or not make any tangible returns at all. This dims their ability to progress to pro investors. Let’s look at the stages of crypto evolution before looking at the ultimate crypto investor tool.
Crypto Signals
Crypto signals are some of the most popular crypto trading strategies for beginners. This involves linking up with a crypto signal provider, receiving trade signals, and entering into the guided positions. Different crypto signal providers, however, adopt varied tactics in their approach of the trade, with significant differences in, for example, the number of currencies they monitor, the mode of signal distribution, and signal fees. Let’s look at this in more detail:
Who Is a Signal Distributor?
Anyone with basic knowledge on how to interpret crypto charts can set up a crypto signal distribution service. A crypto signal provider is an individual or company that sends out crypto trading ideas and suggestions that its subscribers/followers can use to enter into trades. In most cases, these providers will claim to be crypto professionals or highly experienced traders. They will claim to have mastered the trade and are now just looking to help others, especially newbies, turn a coin trading the highly competitive crypto markets.
Crypto signal providers believe and have their followers believe that one can understand the markets by merely looking at the charts. They hold the opinion that they can understand the future of the markets by simply looking at its past operations. But they are wrong. And this line of thinking stems from the inherent human inclination to believe that we can draw patterns from even the most random data.
A signal service provider can also be a cryptanalysis algorithm programmed to identify the best trade entry points. When these points are triggered, the system sends out automated crypto trading signals to its subscribers.
Three types of providers, mainly the professionals that analyze the markets manually, algorithmic systems and a hybrid of algorithm and professionals traders dominate the crypto signal market. The professionals will send out signals based on the results of their market and chart analysis.
Automated traders, on the other hand, have automated systems that send out trade signals as soon as their preset trade entry triggers are hit. The hybrid signals providers, however, use the algorithms to analyze the market and identify trade entry points. But the automated trader’s results have to be counterchecked by a professional before being released to subscribers. They nevertheless have one thing in common; they all base their analysis on the results of a combination of technical analysis tools, latest news, rumors, and market conditions.
The Signal
The trade signal comprises of three critical parts: the trade entry price, the take profit price, and the stop-loss price. Depending on whether you’re dealing with free signals or paid signals, the provider will advise you on the minimum trade amounts for breaking even and maximum profitability.
Some trade signal providers may also offer additional information such as analysis of the different trade prices like the entry price or stop-loss levels. But given the time-sensitive nature of these signals, the provider will only send out the trade entry points first and the information supporting these trade points much later. You, therefore, need to fully trust that the cryptocurrency signal provider has your interests at heart given that you will enter into virtually all crypto trades blindly.
Who Uses Crypto Signals?
Crypto signals are primarily used by crypto investment beginners that can’t yet skillfully analyze the crypto markets and accurately identify the best entry and exit points. Part-time crypto investors who don’t have enough time to properly analyze crypto markets and identify the trade entry or exit points have also mostly relied on crypto trade signal providers.
Depending on signal providers to help you get into trades, however, calls for a lot of trust on the part of traders. This means you need to properly vet the signal providers before subscribing to their services. You need to look at factors such as the experience and professionalism of the individuals behind the service.
You also need to look at their win-to-loss ratio and only subscribe to the provider with the highest win ratio. Additionally, you need to consider the frequency of their trades, their subscription fees, and minimum trade amounts as well as the mode through which they distribute these trading signals.
Modes of Signal Distribution:
There is a very short window of time between receiving the signal and entering into a trade. The speed at which you enter into a winning signal ultimately determines how much you make from the trade. As such, signal providers try to use efficient modes of communication in delivering these signals to as many of their subscribers as possible. Some of the most common modes of signal distribution include:
Texts: Text message is one of the most effective and most popular method of delivering the best crypto signals. The fact that virtually everyone has a phone makes it the perfect signal distribution tool. The text message alert is also hard to ignore.
Telegram bots: Telegram messaging comes in as yet another favorite for most signal distributors. It’s easy to see why it’s the most preferred communication tool. To begin with, it has an alert system similar to that of the text message that’s hard to ignore. Secondly, Telegram allows for the development of automated trading bots that are easy to integrate into the trading systems. These will automatically enter into a trade immediately the signal is received using preset trade parameters.
Emails: Emails also count as a form of signal distribution. However, most signal providers only have them as an alternative distribution option for the text or telegram messages. Sending signals via email isn’t popular and will only work for international clients.
But latency of these channels puts investors at a huge disadvantage in comparison to for example trading bots.
Charges and other fees
A cryptocurrency signal distribution channel can be either free or paid. INFOCRYPTO and Fat Pig Signals are two of the most popular and considerably accurate free signal service providers. These two are telegram based, meaning that most of their signals are delivered via telegram bots. There’s also a host of popular paid cryptocurrency trade signal providers that charge a monthly, quarterly or annual subscription.
Why you shouldn’t consider trading signals as a crypto investing strategy:
- Virtually anyone can open an online crypto signal distribution service and charge a subscription fee. This tells you that signals providers are out to make money – not by trading but from selling untested signals. Furthermore, if these signals were as profitable as they claim, they would open trades, not sell them.
- Most virtual signal providers indicate a disclaimer that their signals are just suggestions, hence no guarantee you will profit from their execution.
- You are obliged to pay the subscription fee whether you win, lose, or fail to trade all their trade suggestions. Most will also prefer upfront payment that compounds the loss incurred from trading fake signals.
- Most will either demand for minimum trade amounts or have their subscriber fees so high that you have to commit significant trade amounts if you wish to break even
- Latency in manually entering the trade may make the signal invalid or at best diminish potential profits
Social Trading Cryptocurrency
Social trading is one of the easiest approaches to investment. It works best for both new part-time traders and investors. To successfully invest in cryptocurrencies, you need a thorough understanding and experience in analyzing the markets. You also have to stay on top of recent news and events around the crypto industry. And lastly, you have to be adept enough to predict the impact of current trends on the price of digital currencies. Social trading and the different social trade platforms that actively promote and allow copy trading can enable you to bypass the need for industry experience.
How does social trading work?
Social trading is a form of networking in crypto trading that involves sharing trade ideas and signals. The most popular form of social trading today is copy trading. Copy-trading allows a trader to copy the trade strategies of another more experienced trader. Interestingly, social trading can be implemented at both the trader expert levels exchange and trading platform level. eToro, ZuluTrade, and NagaTrader are some of the crypto trading platforms that lead the pack in supporting copy trading.
Usually, such providers will have a list of expert traders on their platform that allows others to copy their trades. Highlighted on their profiles will be such factors as their win ratio, trading frequency, coins invested in, risk tolerance levels, and historical trade accuracy. The platform will then charge either a subscriber fee or a commission on earned profits. For instance, eToro charges copy traders 20% of profits made from copying trades.
Like crypto signals, copy trading ensures you don’t need crypto trading experience to invest in cryptocurrencies. You only need a platform that lets you copy trade while maintaining the lowest social trading fees and commissions. You also need to master the art of identifying the most viable expert trader to copy from, paying particular attention to their win ratios and risk tolerance levels.
Why social trading is not the best approach to crypto investing:
- There is no guarantee that the expert trader you are copying will continue with their winning streak or good performance
- You will not always find an expert trader you are compatible with, especially when it comes to risk ratio
- Some platforms charge exorbitant fees and commissions that negatively influence your results in the long run
- Fee structures can push expert traders on the platform to risk-seeking trades thus wiping out trader accounts if the markets don’t go their way
- Social trading doesn’t create enough room for investment portfolio diversification, which additionally puts large risks on investors
BlackBox Crypto Bots
The internet and the cryptocurrency trading space isn’t short of BlackBox crypto trading bots. These are tools that claim to automate the entire crypto trading process and help you scoop unprecedented profitability, while all you have to do is buy the bot or subscribe to their service. According to their vendors, you don’t need to be a professional or highly experienced crypto trader to profit from crypto trading as these pieces of software have the work cut out for you.
The bots and software are fully automated and require little to no effort on the trader’s part. They also have efficiency, speed, and accuracy as their biggest selling points as their vendors boast of their ability to outsmart an average trader both in trade analysis and execution speeds. But even with these seemingly elite features, they have serious faults that make them unfit as a crypto investment tool.
How Crypto Bots Work
Ideally, a crypto bot is an automated trading software that crawls the cryptocurrency market looking for the best trading opportunities. Crypto bots usually follow a specific set of trade instructions when analyzing the market and identifying the best trade opportunities. These instructions are based on factors such as technical indicators, trends or price levels.
With most of the black box crypto trading bots, the settings are designed and updated by the developers of the automated trader. They leave little to no room for customization. Most are online-based as this makes it easy for developers to tweak or overhaul the trade settings more conveniently. However, when dealing with offline trading bots, the provider will send you a link where you can download new or updated trade settings and manually load them on to the bot.
Most of these bots have also embraced different levels of specialization and most crypto bots available in the market today are either coin specific or exchange specific.
Coin specific bots
These are crypto bots that are centered on the performance of a single coin. The most popular is the bitcoin bots that track and monitor bitcoin activities. Their trade settings are centered on the legacy cryptocurrency and can, therefore, only be used to trade bitcoin and bitcoin cash. They are referred to as black-box bots because there is little you can do to tweak their trade settings and their logic is generally hidden from your eyes.
Exchange specific bots
These are crypto bots developed and distributed for one crypto exchanges and its API. The bots are developed by independent crypto analysts and traders but still center on the operations of a specific exchange. Exchange specific bots will only trade some or all the coins listed on the exchange. Note also that most of the exchange specific bots often align themselves with some of the most popular exchanges like Binance, Coinbase or Gemini. They are especially popular with crypto exchanges that support leveraged crypto trades like BitMex, Kraken, and Deribit.
Who can use the bots?
Inexperienced traders: Most of these black box crypto trading bots are marketed as the ultimate hands-free and wholly passive approach to trading. And this appeals most to inexperienced crypto traders looking for a quick way to make money off the crypto market. The automated crypto trading tool especially comes in handy in allowing the inexperienced crypto enthusiast to scrap small profits from the market as they learn how to trade.
Part-time traders: Part-time crypto trading isn’t the best approach to crypto investing. The crypto market is highly volatile and leaving trades open for long – with insufficient risk management protocols in place – can expose a part-time trader to unimaginable losses in case of unexpected market downturns. Trading part-time also means that you have less time to effectively analyze the markets and set up informed trades. For this reason, most of the part-time traders have, therefore, turned to automated crypto trading bots. Their ability to use preset trade settings and incorporation of sufficient risk management tools ensures that they only enter trades when conditions are ideal.
Why crypto bots aren’t the best approach to crypto investing:
- Crypto bots are highly complicated software and arriving at a quality bot involves a lot of trial-and-error and loss of valuable capital.
- There is a lot of secrecy surrounding these automated crypto trading bots. Hardly will you ever know their developers are and this makes it hard to trust a system with your cash when you don’t know the professionalism or ethics of its developers.
- Most crypto trading bots are cloud-based and will automatically receive and execute trade signals or trade settings. They claim to use technical analysis to identify trade opportunities but will never reveal some of the indicators or trade strategies that they use.
- Fraudsters and privacy compromisers have continually targeted and infiltrated the automated crypto trading niche. Also, we still don’t have a proven method of vetting the quality of bots, the experience of their developers, the effectiveness of their strategy, and how they handle private data.
- Some automated crypto trading bots have proven time and again to be a scam only interested in your subscription fees and private data like exchange keys, and vanishing as soon as they have both. You will end up with not only your privacy compromised, but also lose both the bot subscription fee and the crypto trading capital you had invested.
- No opportunity to learn: Since everything is automated, plus the bot doesn’t share the trading strategies and technical analysis indicators used to arrive at the trades, you never get to learn how to trade.
DIY Crypto Trading Bots:
After trying crypto signals and facing the disappointment that is black box crypto trading bots, the crypto investor’s evolution journey pushes them to the DIY crypto trading bot. These DIY trading bots are automated cryptocurrency trading tools. Unlike the black box auto trading tools, however, the DIY auto traders are more professional and more transparent about their system designs and trading strategies.
They also claim to rely on technical analysis and elaborate trade strategies to analyze the market. Their DIY nature also sets them apart from the wholly automated black box auto traders that do not leave room for the customization of trade strategies. With crypto trading bots, you can tweak the default trade settings to align with factors like your risk tolerance.
Their highly transparent nature also makes it easier for you to better understand how the crypto market works. For instance, you can tell the strategy used by your DIY trading bot which technical analysis indicators should be used in monitoring the market. You can also vet its trade entry and exit decisions by setting the factors the bot takes into account before opening a trade position, risk management protocols observed for each trade, and factors triggering a sell-out and exit.
These are all part of learning that help you become a better crypto trader. In essence, the DIY bots address the inherent limitations of relying on crypto signals and the black box crypto trading bots in kick-starting your crypto journey. Two of the most popular DIY crypto trading bots in the market are CryptoHopper and 3Commas. Let’s take look at each of these below:
How Cryptohopper Works:
Cryptohopper is a Ruud Feltkamp’s project that’s currently available to crypto traders in both automated and semi-automated versions. The bot uses market and exchange arbitrage to make profits. The Cryptohopper app is also a strategy design tool that allows the user to customize trading strategies.
Cryptohopper uses technical analysis indicators such as RSI, EMA and Parabolic Sar to scan the markets. Its semi-automatic version is more of a social trading tool that copies the trade strategies of the most successful day traders and sends them out to the rest of the community.
The semi-trading bots scour the market for the best performing trade strategies, copy them, and present them to the trader. It sources trade signals from different traders and forwards them to the trader. The bot essentially presents the trader with a choice and they get to only implement the signals that they feel best matches with their trading strategy.
How 3Commas works:
3Commas describes itself as a smart trading terminal and a combination of trading bots. It features both auto-trading and manual trading systems and uses technical analyses to monitor the charts and markets around the clock. Some of the technical indicators used on the platform include CQS scalping and RSI. Plus it also supports social networking and copy-trading.
Limitations of the DIY crypto bots as professional investment tools:
While the qualities and trading features of the DIY crypto bots dwarf the crypto signals and black-box crypto bots, they are still a far cry from helping traders reap maximally from the crypto market.
- They are based on the idea that finding the right combination of simple technical analysis indicators can bring profits. Maybe it could, but this needs very good backtesting capabilities with large datasets of historical data, which all of these platforms lack.
- With current states of computing, finance, and mathematics, there are more advanced tools available than moving averages or other technical indicators capable of identifying patterns on the market
- These platforms lack the technical performance needed to react to market events. A latency of a minute or seconds outperforms signals or social trading, but is not enough to win the algorithmic race. On the contrary – you are an easy target for more sophisticated algorithms.
- Most DIY crypto trading bots have highly complicated set up processes and getting it wrong at this stage sets you up for losses every time you enter a trade
- Dealing with the bot signals and their different trade settings like where to place the stop loss and take profit levels can be quite confusing
- Most DIY bots are premium service providers that charge subscription fees. Mostly, the profits you make off your returns and time spent configuring trade settings aren’t always commensurate with the subscription fees. They have a high expense to income ratio which makes them unideal trade platforms
- Most of the DIY cryptocurrency trading tools pay more attention to social trading than educating the subscriber on how to improve their trading skills
- Most of the bots are poorly maintained and thus prone to system lags that in turn result in expensive slippages.
Ultimate Crypto Investment Tool: Professional Trading Bots
After looking at the different stages in a crypto trader’s evolution journey towards profitability and why they don’t work, you must now start revaluating your trading style. And looking at some of the reasons why it doesn’t work, you can tell that there is little you can do to turn these trading strategies around. In such a case, what are your options? Who do you turn to, especially if you are looking to undertake significant crypto investments? Well, you can always turn to professional trading bots used by expert traders and institutions.
How Do Professional Trading Bots Work?
These too are automated cryptocurrency trading systems and work to achieve pretty much the same goal as the DIY and black box crypto trading bots. However, they differ from the rest of the automated trading bots in profitability. Unlike the crypto signals and the rest of the automated tools provided by faceless individuals and companies with questionable crypto trading experience, professional bots are designed and tested by pioneer crypto traders and some of the most experienced crypto and money market trading professionals.
You will nonetheless appreciate the fact that most of these bots and platforms are proprietary and expensive. The high price is in appreciation of the time and effort as well as the resources utilized to come up with such a bot and underlying a platform that can react to market events in milliseconds, processing information on hundreds of instruments in real-time. In most instances, these bots often take months or years of hard work from highly qualified teams of professional quants and crypto traders.
Who Uses Professional Trading Bots?
Professional traders
Developing sophisticated and profitable systems requires huge time and capital investments. You need enough money to hire quants to create, test, and roll out these algorithms.
Hedge funds
Hedge funds are the primary inventors and beneficiaries of these professional crypto trading bots. They have funded the development of and own more proprietary algorithms than any other entity. And they present you with the best chance of having the professionally developed crypto bot work for you. Most don’t discriminate and will welcome any client on board as long as you can raise their minimum initial deposit.
Institutional investors
Institutional investors like mutual funds and private equity funds may also come together to fund the development of proprietary cryptocurrency algorithms.
What makes professional trading bots superior to all other approaches to crypto investing?
Here are the unique factors that make professional trading bots better than the conventional DIY and BlackBox auto traders, as well as reasons why you too should consider using one.
- Execution strategies: Virtually all professional trading bots use a combination of different trade execution strategies. And they are all aimed at helping the bot achieve maximum profitability with every executed order. The most common include:
- Smart order routing: Professional cryptocurrency bots aren’t crypto or exchange specific, but are specially designed to monitor the entire industry for the best prices. The algorithm is constantly scouring the markets looking for an exchange with the most promising prices for your orders and executing trades automatically.
- Advanced order types: A professional crypto trading algorithm also uses advanced order types not available to the retail auto traders. These include the iceberg order that hides the real size and value of your orders to ensure the market doesn’t go against you. Alternatively, it could employ the pegged order system where the algotrader passively follows the highest list of trades in the order book in a bid to achieve the best execution prices.
- TWAP and VWAP strategies – are execution algorithms that help you make large trades without influencing the prices
- Passive strategies: The bot will have liquidity provision strategies like market-making. These involve hedging and exposing your capital to minimal risk while benefiting from differences in spreads.
III. Arbitrage strategies: Arbitrage involves buying one cryptocurrency on one exchange and selling it on the other to take advantage of the price differences. It can either be standard arbitrage that involves just one cryptocoin like Bitcoin or Ethereum, or triangular arbitrage for more advanced bots that take advantage of the price difference of up to three coins in different exchanges. Other arbitrages will go as far as specializing in statistical arbitrage and cross-trading a portfolio of crypto assets simultaneously in different exchanges.
- User-defined strategies: Some bots will also have a host of advanced and statistics-based execution strategies that capture and process the widest range of data in the shortest periods to provide the trader with multiple possible correlations that can be exploited to create maximum profitability opportunities.
- Connect to both multi-list and niche exchanges: Bots for long running of stable strategies need to have regularly updated connectors to all the major crypto exchanges like Binance and Coinbase. It should also have connectors to the not-so-popular niche exchanges and over-the-counter crypto platforms. More important than the long list of connected crypto exchanges is the quality of these connectors. Exchanges are constantly changing their APIs and a professional firm who monitors and updates its connectors fast can defend you from losses that would arise from connectivity issues.
- Managed and updated by professionals: Unlike the basic crypto algorithms from faceless providers, the developers of different professional algorithmic traders are industry leaders. They are charged with the day to day management of the system by keeping it and your invested capital safe, updating its core features regularly and ensuring that it maintains optimal performance.
How do you access the professional trading bots?
We already mentioned that these professional bots have for the longest time been a preserve for the capital and digital asset management firms like hedge funds and investment banks. They are proprietary property and the tools behind the success and consistent profitability posted by these firms. Traditionally, you would have to first research the different hedge funds, looking at what they say about the features of their bots before raising a high minimum initial deposit to become one of their clients.
The recent past has however experienced a gradual change in the finance and investment industry with most institutions moving away from the traditional and rather rigid modes of business. And with this industry shift, most of these professional bots have been availed to the retail market at affordable terms for the average investor. Therefore, you no longer have a reason to continue clinging on to the frail crypto signals, the deceitful black box auto traders, the faceless ‘expert’ developers or the expensive and unprofitable DIY cryptocurrency trading bots. Learn how to access the professional proven and tested professional trading both here and start recording hedge-fund-like profits.
Deribit trading bot
Deribit Trading bot
Introducing Deribit Cryptocurrency Exchange:
Deribit is a cryptocurrency derivatives exchange allows for Ethereum and Bitcoin trading on Options, Perpetual and futures trading. Deribit keeps its customers’ deposits in their cold storage with most of the funds stored in vaults with multiple banks safes. Though at this point in time, Deribit only accepts Bitcoin and no fiat currency as funds to deposit. Deribit allows fully automated trading through its API.
Deribit Futures:
For futures trading on Deribit, traders receive a cash settlement instead of physical Bitcoin trading, that means the buyer of the futures do not buy the actual Bitcoin and the seller won’t sell the actual Bitcoin and what will be transferred is the transfer of profits and losses at the agreed settlement price of the contract on the expiration price.
The minimum tick size to trade futures is 0.50 USD and all daily settlements happen at the coordinated universal time (UTC) 8 am. The expiration time is also at UTC 8 am at the end of each month. The size for the contracts at Deribit future exchange is 10 USD with initial margin starting at 1.0% with a linear increment of 0.5% per 100 BTC. The delivery price is the Time Weighted Average of Deribit Bitcoin index measured in the half an hour before the UTC 8 am (7:30 am).
Deribit Perpetual
At Deribit exchange, Perpetual is a derivative very similar to Futures trading but with no fixed maturity and no exercise limit. The perpetual derivatives are to keep their price close to their underlying cryptocurrency price, which at Deribit exchange is referred to as “Deribit BTC Index”.
The Deribit Perpetual contract is 1 USD per Index Point with a contract size of 10 USD. The minimum tick size 0.50 USD and settlements are done at UTC 8 am. The contract size for trading Prepetuals in Deribit is 10 USD. As mentioned earlier there is no delivery/expiration when trading Prepetuals on Deribit.
Deribit Options:
Options on Deribit are traded with what so-called the “European style”. This indicates that options cannot be exercised before expiration, but can only be exercised at expiration. Which this happens automatically on Deribit. Options on Deribit are priced in Bitcoin and Ethereum and also viewable on USD.
Deribit Index:
There are 8 exchanges and the highest and lowest prices are taken out, and the remaining 6 are each at 16.67% accountable for creating an index in Deribit.
Market Making on Deribit:
Deribit does not include an in-house trading desk, therefore all active market makers are the third party Market Makers. The liquidity is provided by these parties and Deribit sees these services as a crucial point to their business. Based on the volume, designated market makers receive tailored agreement on fees.
Deribit API:
For automated trading software and trading bots, Deribit provides three forms of integrating to its API, the FIX (financial information eXchange) API, JSON-RPC over Websockets API and JSON-RPC over HTTP.
Deribit utilizes JSON-RPC which is a light-weight remote procedure call protocol. The JSON-RPC specification defines the data structures that are used for the messages that are exchanged between the client software and the server, as well as the rules around their processing.
JSON-RPC is transport agnostic, it doesn’t specify which transport mechanism must be used. The Deribit API supports both Websocket (preferred) and HTTP (with limitations: subscriptions are not supported over HTTP).
Websocket is the prefered transport mechanism for the JSON-RPC API, because it is faster and because it can support subscriptions and cancel on disconnect. The code examples that can be found next to each of the methods show how WebSockets can be used from Python or Javascript/node.js.
Deribit API has public and private methods. The public methods do not require authentication. The private methods use OAuth 2.0 authentication. This means that a valid OAuth access token must be included in the request
Deribit FIX API is a subset of FIX version 4.4, but also includes some tags from 5.0 version and several custom tags. Deribit uses the standard header and trailer structure for all messages.
Trading bots:
Empirica’s trading platform has been integrated our trading bots with Deribit API in order to operate Bitcoin trading, so that our customers can use it out of the box. Let’s name some trading bots that can be applied using our trading platform through API integration on Deribit:
- Market Making bot: the service of quoting continuous passive trades prices to provide liquidity, and also be able to make some profits throughout this process.
- Arbitrage bot: takes advantage of small differences between markets. It is a trading activity that makes profits by exploiting the price differences of identical or similar financial instruments on different markets.
- Price mirroring bot: this bot uses liquidity and hedging possibilities from other markets to make the markets in a profitable way.
- Triangular Arbitrage bot: using this bot a trader could use the opportunity of exploiting the arbitrage opportunity from three different FX currencies or Cryptocurrencies.
- Basket Orders bot: with this bot, it is possible to execute trades on multiple coins at the same time with the possibility to hedge against other coins.
- VWAP bot: using this bot a trader can achieve the best price with large order by splitting it into multiple smaller ones throughout the trading day.
- Smart Order Routing bot: with this bot, the trader can find the best price for your order on all crypto exchanges and execute it.
In case you would need help from professional software developers to help you build proprietary trading bots and integrate it with API of Deribit or other crypto exchanges, you can consult with our quant team.
Now Crypto. Lessons learned from over 10 years of developing trading software
By Michal Rozanski, CEO at Empirica.
Reading news about crypto we regularly see the big money inflow to new companies with a lot of potentially breakthrough ideas. But aside from the hype from the business side, there are sophisticated technical projects going on underneath.
And for new cryptocurrency and blockchain ideas to be successful, these projects have to end with the delivery of great software systems that scale and last. Because we have been building these kinds of systems for the financial markets for over 10 years we want to share a bit of our experience.
“Software is eating the world”. I believe these words by Marc Andreessen. And now the time has come for financial markets, as technology is transforming every corner of the financial sector. Algorithmic trading, which is our speciality, is a great example. Other examples include lending, payments, personal finance, crowdfunding, consumer banking and retail investments. Every part of the finance industry is experiencing rapid changes triggered by companies that propose new services with heavy use of software.
If crypto relies on software, and there is so much money flowing into crypto projects, what should be looked for when making a trading software project for cryptocurrency markets? Our trading software development projects for the capital and crypto markets as well as building our own algorithmic trading platform has taught us a lot. Now we want to share our lessons learned from these projects.
- The process – be agile.
Agile methodology is the essence of how software projects should be made. Short iterations. Frequent deliveries. Fast and constant feedback from users. Having a working product from early iterations, gives you the best understanding of where you are now, and where you should go.
It doesn’t matter if you outsource the team or build everything in-house; if your team is local or remote. Agile methodologies like Scrum or Kanban will help you build better software, lower the overall risk of the project and will help you show the business value sooner.
- The team – hire the best.
A few words about productivity in software industry. The citation is from my favourite article by Robert Smallshire ‘Predictive Models of Development Teams and the Systems They Build’ : ‘… we know that on a small 10 000 line code base, the least productive developer will produce about 2000 lines of debugged and working code in a year, the most productive developer will produce about 29 000 lines of code in a year, and the typical (or average) developer will produce about 3200 lines of code in a year. Notice that the distribution is highly skewed toward the low productivity end, and the multiple between the typical and most productive developers corresponds to the fabled 10x programmer.’.
I don’t care what people say about lines of code as a metric of productivity. That’s only used here for illustration.
The skills of the people may not be that important when you are building relatively simple portals with some basic backend functionality. Or mobile apps. But if your business relies on sophisticated software for financial transactions processing, then the technical skills of those who build it make all the difference.
And this is the answer to the unasked question why we in Empirica are hiring only best developers.
We the tech founders tend to forget how important it is to have not only best developers but also the best specialists in the area which we want to market our product. If you are building an algo trading platform, software for market makers or trading bots, you need quants. If you are building banking omnichannel system, you need bankers. Besides, especially in B2B world, you need someone who will speak to your customers in their language. Otherwise, your sales will suck.
And finally, unless you hire a subcontractor experienced in your industry, your developers will not understand the nuances of your area of finance.
- The product – outsource or build in-house?
If you are seriously considering building a new team in-house, please read the points about performance and quality, and ask yourself the question – ‘Can I hire people who are able to build systems on required performance and stability levels?’. And these auxiliary questions – can you hire developers who really understand multithreading? Are you able to really check their abilities, hire them, and keep them with you? If yes, then you have a chance. If not, better go outsource.
And when deciding on outsourcing – do not outsource just to any IT company hoping they will take care. Find a company that makes systems similar to what you intend to build. Similar not only from a technical side but also from a business side.
Can outsourcing be made remotely without an unnecessary threat to the project? It depends on a few variables, but yes. Firstly, the skills mentioned above are crucial; not the place where people sleep. Secondly, there are many tools to help you make remote work as smooth as local work. Slack, trello, github, daily standups on Skype. Use it. Thirdly, find a team with proven experience in remote agile projects. And finally – the product owner will be the most important position for you to cover internally.
And one remark about a hidden cost of in-house development, inseparably related to the IT industry – staff turnover costs. Depending on the source of research, turnover rates for software developers are estimated at 25% to even 38%. That means that when constructing your in-house team, every fourth or even every third developer will not be with you in a year from now. Finding a good developer – takes months. Teaching a new developer and getting up to speed – another few months. When deciding on outsourcing, you are also outsourcing the cost and stress of staff turnover.
- System’s performance.
For many crypto projects, especially those related with trading, system’s performance is crucial. Not for all, but when it is important, it is really important. If you are building a lending portal, performance isn’t as crucial. Your customers are happy if they get a loan in a few days or weeks, so it doesn’t matter if their application is processed in 2 seconds or in 2 minutes. If you are building an algo trading operations or bitcoin payments processing service, you measure time in milliseconds at best, but maybe even in nanoseconds. And then systems performance becomes a key input to the product map.
95% of developers don’t know how to program with performance in mind, because 95% of software projects don’t require these skills. Skills of thinking where bytes of memory go, when they will be cleaned up, which structure is more efficient for this kind of operation on this type of object. Or the nightmare of IT students – multithreading. I can count on my hands as to how many people I know who truly understand this topic.
- Stability, quality and level of service.
Trading understood as an exchange of value is all about the trust. And software in crypto usually processes financial transactions in someway.
Technology may change. Access channels may change. You may not have the word ‘bank’ in your company name, but you must have its level of service. No one in the world would allow someone to play with their money. Allowing the risk of technical failure may put you out of business. You don’t want to spare on technology. In the crypto sapce there is no room for error.
You don’t achieve quality by putting 3 testers behind each developer. You achieve quality with processes of product development. And that’s what the next point is about.
- The DevOps
The core idea behind DevOps is that the team is responsible for all the processes behind the development and continuous integration of the product. And it’s clear that agile processes and good development practices need frequent integrations. Non-functional requirements (stability and performance) need a lot of testing. All of this is an extra burden, requiring frequent builds and a lot of deployments on development and test machines. On top of that there are many functional requirements that need to be fulfilled and once built, kept tested and running.
On many larger projects the team is split into developers, testers, release managers and system administrators working in separate rooms. From a process perspective this is an unnecessary overhead. The good news is that this is more the bank’s way of doing business, rarely the fintech way. This separation of roles creates an artificial border when functionalities are complete from the developers’ point of view and when they are really done – tested, integrated, released, stable, ready for production. By putting all responsibilities in the hands of the project team you can achieve similar reliability and availability, with a faster time to the market. The team also communicates better and can focus its energy on the core business, rather than administration and firefighting.
There is a lot of savings in time and cost in automation. And there are a lot of things that can be automated. Our DevOps processes have matured with our product, and now they are our most precious assets.
- The technology.
The range of technologies applied for crypto software projects can be as wide as for any other industry. What technology makes best fit for the project depends, well, on the project. Some projects are really simple such as mobile or web application without complicated backend logic behind the system. So here technology will not be a challenge. Generally speaking, crypto projects can be some of the most challenging projects in the world. Here technologies applied can be the difference between success and failure. Need to process 10K transaction per second with a mean latency under 1/10th ms. You will need a proven technology, probably need to resign from standard application servers, and write a lot of stuff from scratch, to control the latency on every level of critical path.
Mobile, web, desktop? This is more of a business decision than technical. Some say the desktop is dead. Not in trading. If you sit whole day in front of the computer and you need to refer to more than one monitor, forget the mobile or web. As for your iPhone? This can be used as an additional channel, when you go to a lunch, to briefly check if the situation is under control.
- The Culture.
After all these points up till now, you have a talented team, working as a well-oiled mechanism with agile processes, who know what to do and how to do it. Now you need to keep the spirits high through the next months or years of the project.
And it takes more than a cool office, table tennis, Xbox consoles or Friday parties to build the right culture. Culture is about shared values. Culture is about a common story. With our fintech products or services we are often going against big institutions. We are often trying to disrupt the way their business used to work. We are small and want to change the world, going to war with the big and the powerful. Doesn’t it look to you like another variation of David and Goliath story? Don’t smile, this is one of the most effective stories. It unifies people and makes them go in the same direction with the strong feeling of purpose, a mission. This is something many startups in other non fintech branches can’t offer. If you are building the 10th online grocery store in your city, what can you tell your people about the mission?
Final words
Crypto software projects are usually technologically challenging. But that is just a risk that needs to be properly addressed with the right people and processes or with the right outsourcing partner. You shouldn’t outsource the responsibility of taking care of your customers or finding the right market fit for your product. But technology is something you can usually outsource and even expect significant added value after finding the right technology partner.
At Empirica we have taken part in many challenging crypto projects, so learn our lessons, learn from others, learn your own and share it. This cycle of learning, doing and sharing will help the crypto community build great systems that change the rules of the game in the financial world!
3Commas – A technical review
As we know, over the past several years, we have witnessed a real computer revolution. We have practically all available solutions replacing us with computers. These are already such advanced technologies that are already able to make a decision for us, and what’s more, they do it faster and more efficiently than man. It is particularly visible in trading, where several years ago all decisions were made by man. Now Traders are equipped in computer programs who are able to do all the work. However, the market is flooding with information on how many new programmes have been hiring by financial institutions recently. But what about us with retail traders? How should we deal with this situation? It remains for us either programming learning or uses trading bots (free/paid) from the Internet. There are really many of them when you looking for information on the web. That’s why I decided to check 3Commas in this short article. One of many users and additionally paid TradingBots. Let’s have a look at one of them – 3Commas. They were started in 2014, there are over 120,000 users currently being served with transaction volume in the tune of $60 million being handled every day, supported 23 exchanges- data from 3Commas website. You can trade on all exchanges from one single interface from 3commas’ window. Up to date, they support Bittrex, Bitfinex, Binance, KuCoin and Poloniex, Bitstamp, HitBTC, Cex, GDAX, OKEX, Huobi, YOBIT.
How well do 3commas trading bots work?
On the website, we can read that: “3commas is a cryptocurrency trading bot that provides a wide range of tools and services for users to choose from. It performs real-time market analysis using powerful algorithms for getting you the best trades possible”. Sounds interesting? Is this the right place to find a solution for retail traders? 3Commas offer a few types of trading bots: Simple, Composite, Short, Composite short. You can choose which one you want it depends on your individual approach to the market. At the moment available is almost 90 trading bots. Does quantity mean quality?
Browsing information about bots, I wonder why the best strategies work only 30 days. How to trust this kind of bots with short history (just 30 days history)? How do I find out how it behaves with high market volatility? I don’t know. I couldn’t find this kind of information on the 3Commas website. For institutional investors or professional retail investors, this kind of question is fundamental. If you invest money you should know how much you can earn at what possibility of loss. That’s why it’s better for your wallet, to wait for a strategy with a long history to know what to expect.
Can I make a profit on real market with 3Commas?
Let’s see, how 3commas trading bots work. As a retail trader, I would like to try one of these 90 strategies. I choose for my example one “Simple Long Strategy” and I opened Paper Account. Pairs: USD_BTC, USDT_LINK, USD_LTC. Target profit 5%. On 3Commas website we can read the short description: “Simple Long Strategy gives you the possibility to make price increases”- information from 3Commas website. It looks simple to buy a lower price and sell higher price. The bot opens new deal according to one of the conditions that are available for selection during the creation. After that, it immediately puts a coin for sale. If the price rises and the order gets filled, the profit goal is achieved. In case of a price fall, the bot places safety orders below the purchase price every X%. Every filled safety order is averaging the buy price, and it makes possible to move the TakeProfit target lower and close the deal without losing profits in the first price bounce.
My strategy has been worked for 14 days. Completed 15 orders and give me $0.16 profit ($10.000 balance). Strategy performance results and statistics below.
Whether the profit is big or small I leave the answer to you. The rate of return is positive (+0,16$), therefore we should be satisfied (really ?). My “New Bot” did not lose money. Of course, everything was happening on the real market but money was virtual. You should also know that is possible to change strategies parameters at any time and can adapt it to your current needs but I did not do that because left my 100% decisions to the bot.
The main purpose of trading bots is to automate things which are either too complex, time-consuming, or difficult for users to carry out manually. Good trading bots can save a trader time and money by collecting data faster, placing orders faster and calculating next moves faster. In my case, I just set the parameters and Trading Bot did the rest but is it enough to tell that the strategy is good? Please rate it yourself. Meanwhile on the market situation looks very interesting for my example (charts below). The market moved up, how I expected. As you can see from the charts below I could earn more money in this period of time.
You also need to know that 3Commas is not for free. They have four subscription plans: Junior from €0 (your total balance across all accounts is $750 and no bots), Starter €24 (without limits for trading, no bots), Advanced €41 (Simple bots), Pro €84 (Simple, Composite Bots). The interesting thing is that you don’t know how much you can earn but you immediately know how much you have to pay!! Profits are potential but costs are fixed.
How safe is 3Commas?
3Commas don’t go into too many details regarding the security protocols that they choose to employ, however, it’s worth remembering that you don’t actually hold any funds on the platform and your trading bots are not able to make withdrawals from your linked accounts.
Similar to other trading bot platforms, your trading bots connect with your exchange accounts via API and then proceed to carry out automated trades on your linked exchanges. While this process takes place, users aren’t required to make any cash/crypto transfers to external accounts and simply need to provide their API keys which are generated by their exchanges.
These keys provide the trading bots with restricted access to user accounts strictly to conduct trades and do not grant the bots with any withdrawal rights. This also means that if your account becomes compromised, and some hackers were able to gain control of your trading activity, they still wouldn’t be able to directly access your exchange accounts in order to make withdrawals. However, the standard personal security rules of crypto still apply, as they could still have a detrimental effect on the funds held in your exchange accounts. Hackers have been known to obtain API access to exchange accounts, and commander the bots to purchase high quantities of low-value coins that the hackers have already previously purchased. After artificially inflating both the demand and price of said coins, the hackers then sell off their personal holdings for a profit, leaving the compromised account owners holding funds in the low-value coins.
3Commas has made a positive impression. It is also worth mentioning about Key Features:
- Technology – Automated trading takes place via API integration with cryptocurrency exchanges and the bot works around the clock with any device and users can access their trading dashboard on desktop and laptop computers. The team have also developed mobile apps for both Android and iOS
- Tools – The platform provides a good range of trading tools and in addition to the automated bots and performance analytics, users are able to create, analyze and back-test crypto portfolios and monitor the best performing portfolios created by other users. In addition, users can engage in social trading and follow and copy the actions of other successful traders.
- Functionality- 3Commas utilises a web-based platform, and features an easy to use and intuitive user interface that includes a wide range of functions and detailed analytics. Users can make use of short, simple, composite, and composite short bots, and set stop loss and take profit targets, as well as customise their own trading strategies.
Strong points of 3 Commas Bot Platform
- Emotionless, fact-based trades make sure that decisions taken are taken entirely based on the ideal conditions with little room for doubt, instinct, and human error. This reduces the intensity of the decision-making process and helps to take logical and high-profit decisions.
- Good exchange connections.
- The Smart Trading option that makes use of ‘trailing take profit’ keeps the user away from a loss when trading. Since it is designed to stay in the loop and adapt itself to the market, it is an intelligent solution to make as much as possible with a trade.
- Easy to set up for beginners, making sure that newcomers can navigate the 3Commas bot and make trades without any hassles.
- A well-laid-out dashboard and visualization of data allow the users to keep track of everything that is happening while boosting their appeal and ease of use.
- The free access offers a great trial so that users can make full use of the platform.
- A large number of exchange offers a wide array of information centres, making sure that your decision is well thought out with multiple inputs.
- The fact that users can refer and copy portfolios of successful traders.
Weak points of 3 Commas Bot Platform
- Security protocols are not explained with great clarity, raising concerns about whether the trades are truly secure. Users can, of course, enable the 2-factor verification for additional security, but the fact that not much is said about it leaves room for concern.
- The plans change regularly and might prove to be a bit confusing to say the least with 3Comms’ paid plans, commission plans, and a mix of both.
- The balance has to be filled up for commission, which may be a hindrance for many users.
Using trading bots for trading makes life easier. It can save traders a lot of time but will give it earn real money? Popular trading bots available to individual investors (regardless of whether paid or free) have one basic problem, namely the speed of response to changing market conditions, as well as the speed of placing and sending orders. This is not their strength. You will not find any information about latency, what is the maximum number of orders that can be sent per second. Using low latancy software will give you advantage on the market over retail bot users. Therefore, institutional investors have an edge on the market.
But retail bots are good place to start education on how automation on the markets can work.
Read reviews on follwing bot platforms:
Cryptohopper – Technical Review 2019
There is quite a hot market for cryptocurrency trading platforms and algorithmic trading bots. New crypto traders and active traders from capital markets are pouring in funds into algorithmic strategies and bots to make the most out of the constant opportunistic cryptocurrency fluctuation. On the other hand trading platform, providers and investment bots are tailoring their strategies to be tuned well to different scenarios depending on the type of events occurring within the market.
Due to the expansion of development from these trading bots and their adaptability to different events, the process of choosing one has become quite challenging, even for those with technical and trading background, hence at Empirica, we decided to bring knowledge about professional crypto trading bots to interested readers and traders and our selected bot for this article is Cryptohopper.
In this review, we will cover relative features included in Cryptohopper trading platform. We analyze ways that traders can utilize Cryptohopper for their trades. We also take a look at their tool from a technical point of view (our team at Empirica has been focused on the institutional algorithmic trading platform and market making algorithms for almost 10 years). Later in the review, we will also take a look at options we believe Cryptohopper lacks. But first and foremost:
What is Cryptohopper?
Cryptohopper is an retail algorithmic trading platform with a series of configurable trading features (more on professional algorithmic trading platform). Cryptohopper’s platform is shaped around 5 key elements, which each have been developed further to meet the needs of traders. The 5 key elements are:
- Mirror trading
This feature allows investors to copy the trades of experienced and successful forex investors. Strategies are available through a marketplace, some free and some paid. - Paper trading
A simulated trading practice to assess trading algorithms with real and live data. - Strategy designer
A technical indicator assembler which lets traders design their strategies using the listed indicators. There are currently somewhere around 130 technical indicators provided by Cryptohopper. - Algorithmic trading
An automated way of executing trading algorithms with a specified set of configuration. - Trailing stop
It’s a feature designed to stop strategies to operate if a defined trigger has been pulled.
Which exchanges are supported by Cryptohopper?
There are in total of 10 exchanges that are supported by Cryptohopper. Exchanges are KuCoin, Bitvavo, Binance, Coinbase pro, Bitterex, Poloniex, Kraken, Huobi, Bitfinex and Binance.US.
How can I trade with Cryptohopper?
Depending on your sophistication level and trading knowledge, Traders can utilize Cryptohopper platform to their use. There are two bots, the market-making and Arbitrage bots and there are also strategies that can be used to select a set of indicators to form a strategy.
Market Making Bot
The market making bot is designed for retail investors (check market making bot for professional users). It is designed to perform liquidity provision to the market of traders’ choice. The market making bot is a configurable algorithm that executes buy and/or sell (take and/or make) by placing a layered limit of buy and sell orders.
To initiate using the market making bot, traders must go through the preliminary configurations. Starts with choosing an exchange and setting up the API keys. Even using the API the fund still will be located in the exchange and in order to trade on the exchange, traders need to generate an API key and then connect that to their Cryptohopper account.
After the initial configuration, there is also a set of more advanced Market Making configuration. Market and Pricing is the second stage of Market Making setup at Cryptohopper. This stage includes configuration of the market and which pair trader is interested in. Then moving on to the strategy setup with market trends. Market trends are either uptrend, downtrend or it could stay as neutral. Additionally, the order sequence of buying and selling with a given sequence, the order layer which represents the tiered buy and sell orders that are going to be placed and the moving on to the amount constraints within layers (e.g. buy amount, higher ask and percentage lower bid).
The Cryptohopper Market Making bot is also equipped with an “Auto-cancel” functionality which based on the configuration determines when to open and close positions. There is also a time limit to trigger the cancel on the bot. Seemingly the most important feature of the Auto Cancel is the Cancel on the trend, which enables auto cancelling on the bot when the marker changes to a direction e.g. from neutral to a downtrend or from neutral to uptrend and etc. Cancellation on the bot could also be triggered with percentage change, this only happens if the market has a certain specified percentage change or within a given period. The auto-cancel feature also works with the depth limit, which Traders can set from a minimum of 1 to a maximum of 500. Additionally, Traders that are interested in Cryptohopper Market Making bot can set their “Stop-loss” settings. Stop-loss can be triggered in the event of a turn in the market.
Cryptohopper market making bot also provides a revert and backlog feature, where it can move all the failed orders to the Traders’ backlog. Traders can also revert all their cancelled orders from the backlog if Traders decide to revert back a failed market maker orders and re-execute the orders. There are many more settings on reverting back orders that can be automated with configuration, to name of the settings, only revert if it will lead to a profit, or revert/not revert with market trends such as neutral trend, downtrend or uptrend.
In order to slow down the market making bot, Cryptohopper introduced the cool down feature, which the bots cooldowns by removing the order after a certain time has passed.
Cryptohopper has designed a dashboard with some widgets for Traders to monitor the market making bot in action. There is a trading view widget which is a visual representation of the current prices.
Among other widgets available on the Cryptohopper dashboard, there is the order book visualizations with the possibility of manual Market Making which enables buying and selling to be connected to each other and will input that order into the Market Making bot logs.
Cryptohoppe also has created an inventory for all failed trades to be stored in a place called backlog. In order for Traders to be able to use the Cryptohopper Market Making bot they need to be subscribed to the “hero hopper Pro” package, which costs a monthly subscription fee of 99$.
The Arbitrage bot:
The Arbitrage bot of Cryptohopper is designed to capitalize from changes across different markets. The bot allows to trade discrepancies in the market, taking advantage in market price between the same pairs on different exchanges.
Just like the market making bot, the Arbitrage bot also requires a pre-setup procedure to get going with the bot. The procedure starts with setting up the maximum open time of all buy orders, which determined the number of minutes a buy order remains open before the order is cancelled. Following that, there is the maximum open time of all sell orders which does the same thing but for all sell orders.
The setting up procedure then takes traders to exchange setting, where traders should specify two exchanges that would like to perform their arbitrage. Afterwards, they will set the percentage sell amount, which it should use to create the amounts which are being traded and then the Arbitrage amount per market which how much of trade at a time should take place.
In case interested trader would like to utilize exchange specific configuration, they can set minimum profit that they would like arbitrage with. Additionally, there are options to have the maximum open time of the Arbitrage. Traders are also given the possibility to simultaneous arbitrages which determine the maximum number of simultaneous or concurrent arbitrages. Furthermore, they set rate on buy and sells which specify the amount the Arbitrage should check.
The Arbitrage dashboard also includes a backlog where all failed trades will be stored. The dashboard also has the latest Arbitrage trades that were both successful and failed. There are also other widgets inside the Arbitrage dashboard, e.g. exchange arbitrage dashboard results, the last five trades and market Arbitrage results.
Strategies:
Traders using Cryptohopper platform could create a trading strategy with a collection of indicators they have selected. These are the indicators to buy and sell trades. Cryptohopper has created a strategy designer feature where traders create and custom their strategies. There are three ways trades can utilize a strategy. First is to use Market Strategies, these are strategies bought on the Marketplace (we cover features of Marketplace later in this article). Strategies bought from Marketplace which could also be automatically be updated every time the seller of the strategy makes changes on the strategy. Second is built-in strategies, Cyrptohopper offers a set of built-in strategies that are offered free of charge. These are rather basic strategies such as uptrend strategies, buy the dip strategies, Bollinger strategies and etc. Third and last is My strategies, these are custom made strategies that traders built.
Strategy designer:
Strategy designer is a place where traders can personalize their technical analysis setting. There are given a set of indicators where traders can find and configure a wide selection of trading indicators. Traders on cryptohopper can decide on the chart period, buy and sell signals and candle period when selecting an indicator. With candle patterns, traders can directly respond to price movements from the chart data of an exchange.
Furthermore, traders can design their strategies by adding a JSON code, this section is designed for more technical and programmer traders. These traders could also modify existing strategies. Once strategies are configured and up and running, Cryptohopper strategy dashboard allows traders to monitor their strategies.
Cryptohopper Marketplace:
The marketplace is a section within the strategy creation process. This unit is designed solely for social and mirror trading. This is where traders with a usually lower level of experience and knowledge in trading can browse already created strategies and use it for their funds to invest with.
There is a set of strategies and templates available in the marketplace. Each template and strategy has a corresponding base-currency and exchange. Therefore templates can be chosen based on traders preferences. Additionally, all templates have information about their ratings, total downloads, modifications and recentness.
The marketplace also consists of Signalers. All signals in the marketplace correspond to an exchange. A trader can configure their trading using only signals. The Signal configuration could limit orders. The setting also allows traders to take profit with a given percentage set.
Strategy statistics:
Cryptohopper provides traders with a set of statistics in order for traders to be able to monitor the performance of their strategies and trades. There is a variety of ways provided in the statistics dashboard to see how trades and strategies are performing.
The time period for all buy and sell order, allocation of funds based on currency, open positions and base currency reserved. Traders can view their profit stats basing on currency invested on, base currency returns, the base currency gained/lost in current positions and trading fees paid.
Profit based on sell triggers is another statistic available for traders to monitor profit related to percentage profit, trailing stop loss and auto close within time. Traders can also view profits based on buy triggers that we generated by strategies, signalers, trailing stop buy.
Cryptohopper Academy
For traders who would like to be familiar with Cryptohopper as a trading platform, there is a tutorial-like instruction supported by Cryptohopper itself and other instructors can also use this academy portal to provide education knowledge to interested traders.
Our take:
Cryptohopper has done a decent job working out a tool that traders would feel comfortable doing their trades. We really liked the interface and how they have designed a user journey that would fit a different type of traders with different level of expertise. The wording in the platform is well explanatory and hints around important features. Though, as a solution provider for professional crypto market makers, we believe the assessment of market trends are done manually by users and very sensitive to human error. The market making bot has a low ability to manage more market at once and needs of content human supervision.
Check our take on how trading bots for professional crypocurrency traders are build and designed.
Read reviews on follwing bot platforms:
Hummingbot
Hummingbot short review 2019
Hummingbot is a software client that allows users to create and customize automated, algorithmic trading bots for making markets on both centralized and decentralized crypto asset exchanges.
Hummingbot was launched to the public on April 04, 2019. Its main features include a command line-based user interface, trading strategy configuration and trade execution.
| Functionality | HummingBot |
| Installation | Self-driven with Docker images. Needs to know Docker if one wants to use a server. No Docker support in case of problems. |
| User Experience – GUI | All done from config files and a command line. No straightway to visualise the current strategy output. More than one instance hard to manage. |
| User Experience – Parameters modification | Modification of the strategy’s parameters requires a restart of the strategy. |
| Reference price | A midpoint. |
| Inventory management | Automatic size adjustments, manual pricing adjustments. |
| Risk management | No parameters related to risk management. |
| Performance – Technology behind | Written in Python, scripting programming language (one of the slowest) |
| Performance – Price validation | Time interval based orders price validation |
| Connectors | Centralised: Binance, Coinbase, Huobi Global, Bittrex International.
Decentralised: DDEX, IDEX, Radar Relay, 0x Relayers |
| Summary | Humming Bot is set for individuals acting as market-makers on illiquid markets. |
Read reviews on follwing bot platforms:
Vendor website: hummingbot.io
Congratulations to Swissborg for launching successfull ICO on our software
Nothing pleases us more than the success of our partners – especially when we were able to participate in it. The Swiss provider of wealth management services has just started with its Initial Coin Offering. The campaign will end on January 10th, and one of its ingredients is the platform, which we had the opportunity to help building. Why is this solution better than standard ICO dedicated portals? Because it is completely optimized for the needs of our client and it has an excellent UX tailored interface.
To meet these requirements Empirica delegated the best specialists experienced in fintech projects. However, the functionality of this solution can be best assessed by simply using it. For more details visit Swissborg.com In the meantime we keep our fingers cross for the success in raising a whole sum.
About us
Empirica is a Wrocław-based company that supports many local IT initiatives. Empirica is offering solutions such as Quantitative Trading Software implemented by major institutional investors in Poland, market making bot, robo advisory software framework, crypto trading bots and trading software development for companies from capital and cryptocurrency markets.
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