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Are Trading Bots Worth It? Are They Even Legal? (Insights)

Last Updated on 10 February, 2024 by Trading System

Everbody who spends more than a few minutes researching various trading topics online will inevitably stumble upon trading bots. Often they’re marketed as the solution to your issues related to making money in the markets. But are trading bots worth it?

Trading bots are definitely worth it if the logic they employ to profit in the markets is sound and has been tested thoroughly. Unfortunately, this is seldom the case, and many of the trading bots you’ll find online will do nothing but produce losses when traded live. 

In short, there is nothing magical about trading bots in themselves, since they’re merely automated trading strategies that have buying and selling conditions built into them. In other words, their ability to make money depends on if the strategy those conditions make up is profitable or not.

With that said, trading bots definitely is the way to go about trading if you want to become a really serious trader. Here are some of the benefits of using trading bots over manual trading:

  1. They’re More Exact: When placing orders manually, you’re always at the whim of your own capability to remain focused and concentrated. And since humans, in general, are far from infallible, there will be occasions when you place the wrong orders, or simply forget about some important market level. With a trading bot, you won’t have these kinds of issues, even though they will require some monitoring from your side.
  2. They’re Rules-Based: Traders with experience know that it’s essential to create rules-based trading strategies that can be evaluated and tested on historical data, in order to stand a chance. This is exactly what you do when employing trading bots!
  3. It takes much less time: Staring into a screen all day isn’t fun at all! Thankfully, a trading bot will let you focus on other things while your trading strategy remains active and ready to step in to and out of the market.
  4. You can have many trading bots running at the same time: This really is a key benefit that makes trading bots stand out as one of the better solutions you could go for. By trading not only one strategy and market, but several, you reduce your risk level, get a smoother equity curve, and could potentially make more money!

As you see, there are many benefits in going with a trading bot, as long as you can ensure that the underlying trading strategy is robust and has a chance of working going forward!

So how do you do that?

How to Ensure That a Trading Bot is Profitable

To make sure that the rules you employ work well, you, first of all, need to learn how to use backtesting.

Backtesting is when you simulate the performance of a set of rules on historical data, to see how they have fared. That way you quickly get a sense of whether the strategy your considering actually is worth your time, or should be abandoned.

Here is what a backtest result may look like.

Backtest for Trading Bot
Backtest for Trading Bot

Now, if it all looks great, that’s at least a good sign that you’re up to something that might prove to be a good trading robot. However, it’s not enough to make you want to trade the strategy right away.

The reason why you don’t want to trade a strategy right away is curve fitting, which means that you accidentally have fit your rules and conditions to past market data rather than market behavior. The consequence becomes that your strategy is very likely to fail in live trading, since there wasn’t any true market behavior to support the model.

Although it might not seem like a too serious of a problem, you really shouldn’t belittle the role that curve fitting has on your trading models. Most times you simply don’t notice, and would risk losing a lot of money if you were to take those backtested strategies to live trading right away.

One of the best ways to detect strategies or trading bots that are curve fit is to paper trade the strategy a while, and see how it performs. If all goes well you may start to slowly trade the strategy, and then step up your position size as everything develops in the right direction.

Are Trading Bots Legal?

Trading Bot
Trading Bot

Yes, it’s legal to use trading bots. Although some people do have their objections to how automated trading impacts the markets, there are no rules or laws in place that keep retail traders from using trading bots.

How Scammers Sell Trading Bots With Seemingly Great Performance

Let’s now return to those scammy trading vendors who have made a big business of selling trading bots that promise riches to the masses.

Many times, trading bots are marketed with perfect performance reports where the equity line looks like a line that’s drawn from the lower-left corner to the upper right corner.

Results like this suffer severely from curve fitting. This often means that the seller of the trading bot has imposed various filters and conditions to ensure that the historical performance gets as close to perfect as possible. In other words, the strategy defines random price patterns that are extremely unlikely to continue going forward.

Most new traders marvel at the sight of the perfect line, and don’t understand that it’s all made up. 

Related reading: Is Trading Safe?

How to get started With Trading Bots

If you’re looking to start using trading bots that trade for you, we highly recommend that you learn how to build your own strategy. Although there are some reliable trading strategy providers, you want to not rely on others as long as it’s possible.

Here at The Robust Trader we have put together a complete guide to algorithmic trading where we cover various aspects of automated trading. We also recommend that you check out our massive article on how to build a trading strategy, where we talk more about the process of validating trading strategies.

Ending Words

Trading bots are marketed heavily by fake trading vendors, and could be said to have gained an unfair reputation.Although some people completely dismiss the idea that trading bots can be profitable, the truth is that a trading bot is as good as the strategy it defines.

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