Crypto Bot Trading: The most important input variable for profitable trading
Today we are going to have a look at bot trading in the crypto market as it becomes more and more famous among retail traders. I’ve built and used many many bots operating in the Forex market actually, and there is clear upsides to bot trading such as that it
- takes out emotions out of trading,
- 100% availability at all times, and
- the strategies are easily backtestable.
Yet a lot of traders underperform or are even losing money with bot trading, so today we are going to have a look at a very important, maybe even the most important input variable for bot trading. The problem is, a lot of traders are not even considering this variable in their strategy.
I’ll walk you through it by looking at three example bots and their performance:
Above in the picture you can see our three bot settings; they are all running on a 50k US Dollar balance account. We have different trading frequencies between 1 to 10 trades a day, different risk management settings, order types, and products traded. As a first step, let’s have a look at how much profit the bots have to make in order to break-even on exchange fees. And no, I am sorry but there are no bots that consistently make you thousands of percent per year in return. Those just do not exist, everyone would be a billionaire in no time, and even if they do, the last thing that people would do is publish them and increasing the risk of being frontrun. Chasing bots showing incredible returns is probably one of the riskiest things trader can do. So, how much return is needed to be break-even on fees first of all?
While the fee levels at your exchanges look like very small percentage numbers, we can see that those fees add up to very large numbers. You may pay 133k USD fees for running the first bot, 72k for the second, and 20.3k for the third, which represent a necessary return of 265%, 143% and 41% for the three bots just to break-even. This is what you pay if you trade the bots at exchanges not optimized for the specific bot strategy. If you would optimize the exchange for the specific bot, you can reduce those fees a lot. Compared to Forex, which I mostly traded in the past, fees in Crypto trading are still high in general though. A standard lot roundturn in EUR/USD, so 100k USD buy and sell, costs you like 5–10 USD in spread and commission, while in Crypto trading with a taker fee of 0.06% it costs you 120 USD. Fees at crypto exchanges differ extremely though, and they differ especially depending on how much volume, whether having market or limit orders, how much balance you have on the account, and so on.
In an optimized exchange setting, you could reduce the fees of those three trading bots to 39k, 24.4k, and 6.8k. I will show a very easy way to find the ideal setting for your bot later that actually only takes a few minutes, but let’s quickly have a look at one more thing first:
The anticipated return of your fee optimization is not only the difference in percentage here of 265% and 78%, but those savings in every trade compound over time. Compounding is one of the greatest things in finance and trading, so let’s have a quick example of what that would mean for the three bots.
Let’s assume you had the bot running in a non-optimized scenario and it made an overall break-even performance. If we now assume the fee difference in an optimized scenario becomes our profit per trade, and we keep all other input variables the same, the first bot would actually make an annual performance of 550%. I mean, this is just simple maths, no rocket science. I am only compounding the profits over the course of one year for the specific bot settings. I hope you can understand now why I said in the beginning of this article that the fee setting might actually be the most important input variable for bot trading. The absolute effect in fee difference is already big and can easily make the difference between a profitable and a non-profitable bot, the compounded effect is even bigger though.
As promised I am going to show you now how to actually optimize your bot fee set-up. As said, there are hundreds of different tiers levels, with much more tier requirements and different fee levels in each tier at the largest crypto exchanges. This makes a manual optimization pretty much impossible.
So what we can do is head-over to dr-fee.com, where we can just type in the monthly spot and or futures volume, the amount of maker and taker percentage, the balance on the account, the holding of the native exchange token we would be willing to hold and so on. We just click next, and we directly see how much in fees the bot would create at the different large crypto exchanges.
This is actually the scenario of our first bot earlier. We can see the absolute fees at each exchange, select additional exchanges here, and also scroll down to see more info and get a link to all the details of the specific exchange. It’s pretty easy and straightforward and shouldn’t take more than 2–3 minutes for the whole process. If you have the bot running already, you can actually also just connect that exchange account through a read-only API and all the input factors which we typed in earlier are read in the trading history and the report is generated automatically. If you don’t know your volume or maker taker share or so, that makes it easier.
Let’s slowly wrap-up.
The bottom-line is an optimized fee set-up for your bot can make a huge difference for your profitability, and there is really no way to say which exchange is the best to trade at because it differs for each bot, the volume you are trading with it, and so on. When trading with bots or also copy trading, you should have a look that the provider actually allows you to choose different exchanges such as 3commas, Shrimpy and Coinrule, so that you can optimize your set-up. Many exchanges themselves are also offering basic bots which you can combine for your trading, so you can choose the exchange which fits you best there. If you are running the bot on your own server, you can freely choose the exchange anyways.
One crucial aspect for the bot fees is the share of market vs. limit orders. If not required for your bot to execute as market order, you may be able to significantly increase its performance if increasing the share of limit orders. Retail traders in Forex usually have the same fee levels for market and limit orders, but in Crypto trading it is very different, with market orders many times more expensive compared to limit orders at a majority of the exchanges.
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Find out more about dr-fee at dr-fee.com
Stay safe and happy trading!
Note: None of the above should be considered financial advice and the information in this article may be outdated
