Trading bots are programs designed to relieve the stress of analyzing and trading the markets as a trader. Often marketed with lots of promise, trading bots leave naive users rueing their losses in many cases. But, why do trading bots fail?
Trading bots don’t work because the strategy has been curve-fitted to historical market movements. In other cases, the trading bot doesn’t work due to the actions and inactions of the trader and how the bot has been deployed. You can guarantee your bot works by developing one yourself.
The rest of the article will look at seven reasons why trading bots don’t work after traders buy and deploy them. We’ll also discuss how to make sure your trading bot doesn’t stop working! Keep reading if you want to learn more.
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
7 Must Know Reasons Why Trading Bots Fail
Unsustainable Core Strategy
The trading world is replete with many people cooking up impressive results for the sole purpose of attracting investors and buyers. This is why they spend more time finding a set of trading rules that’ll create an attractive equity curve in a backtest instead of basing them on sound principles.
In many cases, the results are achieved by curve-fitting or applying toxic money management techniques like a martingale. Some have a very small profit target and a large loss limit. When these factors align, you’ll get a trading bot that generates excellent backtested results but fails almost immediately when deployed in a live trading environment.
Unfavorable Trading Environment
Similar to the point above, some trading bots are designed to take advantage of very small inefficiencies that you can only replicate in specific trading conditions. For example, some trading bots take advantage of small price movements in specific time windows on a particular broker. Taking the trading bot to another broker that has slightly different pricing dynamics can yield imperfect results.
For example, if a trading bot only works on a specific asset where a broker charges fixed two points as a spread, taking it to another broker that charges a floating spread that can reach 6-10 points during the recommended trading window for the strategy can make the bot stop working.
Inadequate Capital
Some trading bots are meant to stretch your trading equity to generate results. This is primarily true with high-risk systems that deploy a martingale approach or those that don’t take volatility into account. With such a system, you need an account size that matches the sums used in the original backtest. Otherwise, the bot will trigger a margin call if exposed long enough to standard live market conditions.
Use on Wrong Assets
Some bots are supposed to work on low-volatility assets. Once you deploy them on high-volatility instruments, they can burn through a trading account quickly. Most legitimate trading bot programmers will have a recommendation on the assets you can trade.
However, this isn’t always fool-proof because a low-volatility instrument can turn high-volatility over a short period. Unless there’s a contingency plan built into the bot for such a scenario, the bot will likely crash a trading account if deployed on the low-volatility asset during such short-term scenarios.
Indiscipline Leading to Unnecessary Tweaks
Indiscipline makes traders with programming skills start fiddling with the code on a trading bot after a few losing trades. This can render the bot ineffective. The best trading bots are based on sound principles covering years of backtesting. Making arbitrary changes in a bid to avoid losing trades can ruin the core of the strategy—especially when you’ve not backtested your tweaks to see how it affects the trading results over the longer term.
Low Capacity
Many trading bots that go public can lose their edge if they’re based on fragile principles. With thousands of people using the same bot, the market inefficiency exploited may cease to exist. This is most visible when many of a bot’s users are trading with the same broker.
Technical Failure
Most traders using bots host them on virtual private servers to ensure they’re working round the clock. Any disruptions in the technical setup can cause the bot to stop trading. Unless you regularly check its performances, you may not notice the anomaly, and it could end up proving costly.
How To Make Sure Your Bot Doesn’t Stop Working?
You can do a few things to ensure you have a bot that’ll continue to work over the long term. Listed below are a few things that you can do to ensure that your trading bot doesn’t stop working:
Develop One Yourself
The core of any quality trading bot is made of a systematic trading strategy with detailed entry, exit, and money management rules. If you have such a system, backtest it across a couple of decades to see how it performs. If it beats most benchmark buy-and-hold investments and posts a manageable overall drawdown, you can work towards putting it into code.
Remember, you need to ensure your backtest is based on sound principles and not curve-fitted. You also need to account for swings in market volatility by making sure the bot can adjust risk based on prevailing market conditions. With all of these metrics sorted, there’s a high chance of profitability with your bot.
Don’t Buy Cheap Bots Accessible to Everyone
In more than 99% of cases, cheap bots posted in open marketplaces end up failing. Avoiding them will help you save thousands of dollars when you calculate the cost of the bot and the cost of the account you’re bound to lose over time.
Even when the bot works, thousands of traders using it can make it lose its edge. If you don’t have a system to convert into a bot and intend to buy, seek out licensed quant development companies in regulated jurisdictions to work out a deal. Such bots will definitely cost more than just a few hundred bucks, but you’ll have a higher chance of succeeding with it.
Stay Disciplined
If you’re disciplined, you’ll allow your bot to keep trading without any interference, hence ensuring it doesn’t stop producing results. Traders with technical skills can interfere with a bot’s trading. Still, even non-technical traders can also affect a bot’s results when they start closing trades manually or turning off the virtual private server arbitrarily.
Many traders use bots because they help take away the emotions from trading, but indiscipline can still rear its head when using the bot in the ways we’ve mentioned. You may no longer be making the buy and sell decisions, but indiscipline can make you sabotage a perfectly working bot.
Ensure Excellent Technical Setup
As we mentioned earlier, a few technical bits come together to make a bot work. Apart from a compatible platform, you need to have a system that ensures the bot will remain online during the hours it’s designed to work. This may involve having a computer you can keep working over that time or renting a virtual private server. Regardless of the setup you choose, you need to ensure it matches the computing requirements for the bot and won’t fail frequently.
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Conclusion
Trading bots don’t work if they weren’t designed based on a sound hypothesis. This is the situation with most cheap bots. When high-quality bots don’t work, the fault can be traced to the trader’s behavior and general setup.
If you have a solid trading infrastructure and your bot doesn’t work as advertised, the first thing to do is confirm if the behavior is in line with backtests. For example, if there are a couple of losing years in the backtest, you shouldn’t discard the bot after a few losing weeks.
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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