Trading bots carry the prospects of entering and exiting the financial markets hands-free. The bots handle the thinking and executing of trades, giving you the chance to channel your time and energy towards something else. But, are trading bots legal? Are they legit?
Regulation wise, trading bots are legal in most jurisdictions. But, not all bots available for purchase in the market are legitimate. Choosing bots from companies that show trading outcomes, are regulated, have a long standing history, can help you identify legit trading bots and avoid fake ones.
This article will look more closely at trading bots and everything you need to know about using them. We’ll answer the question: are trading bots legal and legit?
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Is a Trading Bot?
Trading robots are programs containing the entry and exit rules of a trading strategy translated into code. The codes can be in several languages, including MQL (based on C++) and Python. Once completed, the algorithm created can analyze the market and execute trading decisions.
With a bot, you won’t have to rely on your trading skills or have to sit in front of a computer all day. Bots also help to deal with the psychological angle to trading—which can help improve your overall success rates.
Are Trading Bots Legal?
Many trading jurisdictions around the world don’t have any regulations that prohibit the use of bots. Therefore, most popular trading platforms allow traders to use them.
However, a few brokers either make stringent rules against the use of bots or ban them altogether. So, trading bots are legal regulations-wise. You only have to find a broker that doesn’t have any rules against them. Fortunately, all the top trading platforms support them.
Are Trading Bots Legit?
One of the problems with trading bots is that the marketplace has plenty of scams. This is why their legitimacy is regularly called into question. There are thousands of examples across the web showing how many companies and individuals sold the bots but failed to replicate the results promised. Most of the victims of these scams don’t recoup their losses.
The sellers often provide money-back guarantees, but they never honor these agreements, and in many cases, they close long before people start to wake up to the con.
Away from the scams, a few companies are selling legitimate bots that hold some potential. We’ll look at how you can find these companies below. However, the best way to secure a trading bot you can count on is to create one yourself.
If you have a tested, trusted, and robust trading system that follows a fixed set of rules, you can convert it into a program. Of course, this requires knowledge of the programming language used on your preferred trading platform.
If you don’t have the skills to make the bot, you can hire a professional you can trust not to resell your strategy and maybe render it ineffective.
How To Find Quality Trading Bots Online?
The rule of the thumb for finding quality trading bots online is to avoid options that sound too good to be true. Here are some other tips to keep in mind:
Avoid Cheap or Free Bots
Why will a bot that is profitable sell for $100 or less? If you find a cheap bot, there’s a high possibility that the endgame is to con as many impulse buyers as possible into making the purchase. It’s easier to “risk” $100 on a potential quality bot than $2,000. That’s not to say that all expensive bots are high-quality, but weeding out the cheap ones will save you time and money.
Avoid Companies Making Grand Claims
If you find a bot listed on a website with pictures of fancy cars, properties, women, and cash falling from the sky, don’t buy from them. Similarly, any company that guarantees mouthwatering returns is likely fake. Unpredictability is a core feature of the markets. So, when you find blatant marketing copy framed with lots of bargaining, you’re about to fund the lifestyle of a scam artist.
Choose Companies That Put the Real Numbers First
A genuine bots company will focus on showing you the numbers and highlighting what the bot can do with facts and figures. Everything should be out in the open, including annualized returns, drawdowns, backtest results, live market results, etc.
They also don’t need to wrap these around marketing speak but in a direct and professional tone. These companies won’t use flowery language laced with jargon in the hopes of causing confusion and making it harder for you to think critically.
Choose Regulated Companies With Years of History
A company regulated by a reputable body like the FCA in the UK, for example, is less likely to be involved in selling fake robots. Check the business name against the regulator’s register to ensure they’re not using someone else’s registration details.
Similarly, a company that has been around for five years or more will be less likely to scam users than one with a domain name registered just weeks ago. A company with history will also have some reviews (positive and negative) on the web.
Check Reviews Online
If you can’t find legitimate reviews on the bots from any company, take their claims with a grain of salt. When reading reviews online, you need to know how to separate genuine reviews from paid or fake ones.
An honest reviewer will leave a helpful post in forums and social media. Check the account to ensure it has a decent history of contributions. A 1,500-word review on a dodgy website or multiple posts on different platforms with usernames that have no history is a sure sign of sponsorship.
How Are Fake Trading Bots Made?
Some of the common ways fake trading bots are made include the following:
Choosing a Favorable Backtest
Here, the scam artist runs dozens of backtests using some randomly generated rules and then chooses the set of rules that presents the best results. When you buy such a bot, you’re only buying the “lucky monkey.” No proper thought has gone into creating the bot, so it’ll likely lose money in real-life conditions.
Applying Heavy Curve Fitting
Curve fitting refers to the persistent adjustment of trading rules to generate better results from a sample backtest. If you tweak the rules enough over the same market, you’ll end up getting a good-looking curve. For example, a strategy that incurred heavy losses on a specific day may be coded to skip that particular day without any real justification. Similarly, stop limits and take profits can be changed arbitrarily to find a combination that delivers the best result.
Showing Backtest for an Unsustainable Strategy
The internet is filled with lots of no-loss strategies that promise to make money forever. In reality, those are mostly scalping systems combined with martingale money management strategy. They don’t actualize losses, but rather they keep closing out really tiny profits. Such trading bots are one bad trading day away from blowing away all the profits made in previous weeks or months.
Author’s Recommendations: Top Trading and Investment Resources To Consider
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Conclusion
Trading bots are legal because most top trading platforms have no problems with traders using them. Many brokers today have more people using trading bots compared to manual traders. However, the nature of the trading world is such that finding legitimate trading bots to use is an arduous task.
Most traders that work with trading bots create their own programs from scratch. Those that don’t have the developer skills required will share the trading system they’ve created and backtested with a qualified programmer to come up with a bot they can trust with their money.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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