Module 13: Trading Systems and Automation
Trading Bots
Chapter 7 of 12 · about 5 minutes
7.1 "Passive income while you sleep"
Mint saw an ad for a trading bot: "Earn passive income 24/7. Our AI bot made 12% last month. No experience needed."
"Should I try it?" Mint asked.
"Let's first understand what kinds of bots exist and what they actually do," said Hash. "Some are useful tools for following a strategy consistently. Some are reasonable strategies wrapped in exaggerated marketing. And some are outright scams. A bot is only as good as the strategy inside it, and the risk management around it."
7.2 Common types of bots
| Bot type | What it does | Works best when | Main risk |
|---|---|---|---|
| DCA bot | Buys a fixed amount at regular intervals | Long-term accumulation | Keeps buying in long declines (as designed) |
| Grid bot | Places buy and sell orders at set intervals within a range | Price moves sideways within the range | Price leaves the range |
| Signal bot | Trades when specific rules or indicators trigger | Your rules have a real edge (Chapters 2 to 4) | Overfitted or poorly tested rules |
| Rebalancing bot | Maintains target portfolio weights (Module 12, Chapter 5) | Long-term portfolios | Taxable events, fees |
| Arbitrage bot | Exploits price differences between venues | Inefficient markets | Competition, execution and transfer delays, exchange risk |
| Market making bot | Places buy and sell orders around the price to earn the spread | Stable, liquid markets | Sharp moves leave it holding losing inventory |
| Copy trading | Automatically copies another trader's positions | The trader is genuinely skilled and risk-aware | Copying someone's mistakes, delays, and hidden risks |
7.3 DCA bots
Dollar-cost averaging (DCA) bots buy a fixed amount on a schedule, such as $100 every week, regardless of price (Module 1, Chapter 12). They're among the simplest and most widely used forms of automation.
| Benefit | Limitation |
|---|---|
| Removes timing decisions and emotion | Doesn't avoid buying through long bear markets |
| Averages entry price over time | Fees on each small purchase add up |
| Easy to set up and follow | Requires choosing a sensible asset and amount |
Many exchanges offer recurring purchase features that work as simple DCA bots, without needing API keys.
7.4 Grid bots, step by step
A grid bot divides a price range into levels and places buy orders below the current price and sell orders above it. Each time price moves up one level, it sells a slice it bought one level lower, earning the difference.
Example.
| Setting | Value |
|---|---|
| Range | $90,000 to $110,000 |
| Grid levels | 10, spaced $2,000 apart |
| Capital | $10,000, about $1,000 per level |
| Gain per completed round trip | ~2% of the slice, minus ~0.2% fees, about $18 |
| Market behaviour | Outcome |
|---|---|
| Oscillates within the range, completing 30 round trips in a month | ~$540, about 5.4% for the month |
| Trends steadily up through $110,000 | All BTC sold along the way; misses further gains |
| Falls through $90,000 | Bot has bought BTC all the way down; holds a losing position, with no more buy orders below |
Grid bots profit from choppy, sideways markets and struggle in strong trends, the opposite of trend following (Chapter 2). They're a form of mean reversion, and their reported returns often look excellent during ranging periods, until the range breaks.
"So the 12% the ad mentioned could have been a grid bot in a sideways month," said Mint.
"Possibly," said Hash. "And next month, a breakdown could take back more than that."
7.5 Copy trading
Copy trading automatically mirrors another trader's trades in your account. Platforms usually show each trader's past returns.
| Question | Why it matters |
|---|---|
| Over how long, and how many trades? | Short records may be luck (Module 12, Chapter 11) |
| What's the maximum drawdown? | High returns with huge drawdowns may mean extreme risk |
| What leverage do they use? | Leverage that suits them may not suit you (Module 12, Chapter 7) |
| Are results shown after fees and slippage? | Copiers often get worse prices than the leader |
| Does the leader profit from copiers in other ways? | Commissions or fees may change their incentives |
Survivorship bias is strong in copy trading: leaderboards show traders who've done well so far, not the many who blew up.
7.6 Bot scams
Bot-related scams are common (Module 2, Chapter 11):
| Red flag | Why it's a warning |
|---|---|
| Guaranteed or fixed returns | No real trading strategy can guarantee returns |
| You must deposit funds with the bot provider | Your money may simply be taken |
| Requires withdrawal permissions on API keys | Allows theft (Chapter 6) |
| Referral bonuses for recruiting others | Possible Ponzi structure |
| "AI" or "quantum" claims with no explanation | Buzzwords hiding a lack of strategy |
| Unverifiable track records | Screenshots are easy to fake |
7.7 Evaluating any bot
- What strategy does it run? Trend, mean reversion, grid, arbitrage? (Chapter 2)
- In what conditions does it fail? Every strategy has them.
- Is there an honest, long track record, including drawdowns and costs?
- Where are your funds held, and what permissions does it need?
- What are the fees?
- Can you stop it instantly? (Chapter 10)
7.8 Try it yourself
Use a grid bot simulator, or a spreadsheet, to model the grid in section 7.4 on BTC's daily prices over the last six months. How many round trips would have completed? Did price leave the range? Then compare the result with simply holding BTC over the same period.
Key takeaways from this chapter
- Bots include DCA, grid, signal, rebalancing, arbitrage, market making, and copy trading, each with conditions where it fails.
- DCA bots automate regular buying and are among the simplest and most robust uses of automation.
- Grid bots profit in sideways markets and suffer when price breaks out of the range.
- Copy trading carries risks from short records, high leverage, worse fills, incentives, and survivorship bias.
- Guaranteed returns, deposits with the provider, withdrawal permissions, referral schemes, and buzzwords are red flags.
- Evaluate bots on strategy, failure conditions, honest track record, custody, fees, and the ability to stop them instantly.