How Effective Are Trading Bots Really?

Trading bots are widely available programs that connect to a user’s cryptocurrency exchange and make trades on their behalf. They work using a variety of indicators and signals, such as moving averages and indices. The idea is simple: to help users make money in the markets, while not wasting a lot of their time. The underlying assumption is that computers are much better at trading than humans could ever be, because trading is all about mathematics and complex calculations of probability.

While this may or may not be the case, it is very difficult to find actual performance reviews of trading software, and anecdotal evidence seems to suggest that most traders either lose money, or do not outperform the markets.This is particularly true in the crypto-space, where there are no easily accessible vehicles to short the markets, making price increases the only viable option.

The extent to which mutual fund managers, underperform is very well documented, and often underappreciated. In several performance reviews by Standard & Poor, it was concluded that between 92% and 94% of actively managed mutual funds generated lower returns over a 15-year timespan than the S&P 500 index. This does not factor in the funds that failed over that time, making the actual figure even worse. From what we have seen, trading probably follows a similar pattern in which very few experts make a lot of money, and most people lose out.

To the best of our knowledge, no satisfactory studies and analyses exist for trading bots in the crypto space, nor for the average performance of day traders that try their luck in the blockchain markets. This is exactly why we are starting this series on trading and performance reviews.

Trading Algorithms

The suspicious lack of actual data supporting one trading algorithm or another, or delivering substantial evidence that these automated trading bots are able to outperform the markets could be due to several reasons:

1) They generally do not outperform the market, and it is against the interest of the trading bot industry to disclose this information.

2) Trading bot makers fear legal reprisals if they make concrete claims

3) Trading bots do outperform the market, and it is in the interest of users to keep their exact performance a secret, such that they may keep their edge.

4) They generally do about as well as the market.

The likeliest answers, in our estimation, is that trading bots, in general, either do not outperform the market, or perform about as well as the market. This does not necessarily explain the frustrating lack of statistical data, or performance analysis, but we must consider that the cryptocurrency trading phenomenon is relatively new. Many crypto traders are either not professional, or lack the analytical toolset, or motivation to report on their findings. Since the crypto markets have been, on the whole, extremely profitable even for amateur traders, it is not too surprising that no one has scrutinized the exact numbers, because the field has been dominated by gamblers and not professionals.

This is not to say that algorithmic trading is, on the whole, suspect. Arbitrage trading is something that computers have a distinct advantage at, because they can quickly detect the smallest of differences in the price of trading pairs, and continually scan through thousands of such prices. We do not claim that there is no possible successful trading algorithm, but suggest caution and skeptical inquiry.

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