How to train an AI bot to day-trade crypto

Training an AI bot for crypto trading opens up 24/7 market access and speed. Learn how to build or deploy bots, the risks involved, and how they can fit into your strategy.

Imagine having a tireless assistant that trades cryptocurrency for you, analyzing data and executing strategies even while you sleep. That’s the power of AI trading bots. 

These software programs use advanced algorithms to mimic human trading behaviour, manage strategies and adapt to changing market conditions. 

What is an AI bot for crypto trading?

As mentioned, an AI bot is software that replicates regular human trading activity. These tools analyze human behaviour, such as how they typically day trade and create rules to abide by. 

For example, if a bot finds that humans historically buy Bitcoin BTC$99,396 at a specific price and sell it at another, it will factor that into its ruleset. An AI bot continuously evaluates market activity to refine its operations, allowing you to input custom rules and parameters to guide its decisions.

This article serves as an AI crypto trading bot tutorial and will introduce you to the benefits and risks of training an AI bot for crypto trading.

Why train AI for crypto day trading?

Like any person, AI bots are prone to mistakes. This lack of a perfect track record might turn you off from implementing a bot into your trading strategy. Despite this, there are many reasons to have an AI trading bot setup. 

• 24/7 trading: As a human, you can only trade so often. The crypto market is active 24/7, making it impossible for you to stay on top of it all the time. A bot doesn’t fatigue. It doesn’t need rest and can implement your trading strategies even while you’re away.
• High-speed capabilities: Not only is a bot available 24/7, but thanks to machine learning for crypto trading and the speed of modern technology, a bot is faster than you even while you’re awake. AI day trading crypto bots can process millions of calculations per second, and even if it makes a mistake, that speed can potentially make up for a failure before you notice.
• A non-emotional approach: Using AI in cryptocurrency trading can benefit you greatly, as it doesn’t factor emotion into its strategies. It won’t freak out and do a reactionary sell-off based on a gut feeling. Instead, the bot will trade based on its rulesets and training parameters.

Did you know? You can train bots using the strategies of famous traders like Warren Buffett. While this is no guarantee for success, it’s one of the ways to train your bot.

How to train a crypto trading bot   

There are two ways to start day trading crypto with AI. You can build a bot from scratch or you can sign up for a pre-existing platform like Coinrule or Pionex. 

Build an AI crypto trading bot from scratch

Building an AI crypto trading bot from scratch requires a bit of technical expertise. To start, you must understand a programming language like C or Python, which are essential for building rulesets and automating trading steps.

Next, the bot needs access to real-time crypto prices. This data can typically be retrieved from cryptocurrency exchanges via their application programming interface (API). APIs act as intermediaries, enabling seamless communication between applications — much like the social media sharing buttons on this page. 

Think of an API as someone taking your order at a restaurant. You need a service that only the restaurant can provide, and you use the waiter as a middleman to make it work. The API is the middleman that handles your request.

With these two requirements satisfied, you’ll need to program an AI algorithm for crypto trading. Of course, this means you need to understand the trading strategies. Some common day trading strategies include: 

• Scalping: Scalping involves buying and selling crypto based on their minute-to-minute price changes. You’re taking advantage of crypto’s inherent volatility, buying when it drops a few dollars and selling when it jumps a few. This trading method isn’t focused on massive profits but instead on small profits that add up over time.
• Technical trading: Many day traders utilize technical trading strategies like the relative strength index (RSI) or the moving average convergence/divergence indicator (MACD).  The RSI helps identify whether an asset is overbought or oversold, while the MACD tracks price momentum and trends. Both are essential for predicting market movements and timing entries and exits.
• Arbitrage: Cryptocurrency exchanges show different prices at different times. Arbitrage involves buying a cryptocurrency on one exchange where the price is lower and selling it on another where the price is higher, capitalizing on the price discrepancies. Programming this will require multiple exchange APIs, of course.

Many bot developers build a bot focused on one of these strategies, such as an arbitrage bot or a scalping bot. You can always swap the strategy at a later date or build multiple bots. 

Once you’ve built out a bot, you must check it through backtesting. Backtesting involves simulating trading based on historical data to evaluate how the bot would have behaved in past market scenarios. It’s a lot like a sports team running drills to practice situations that will appear in a real game.

After successful backtesting, it’s time to release it into the wild. Here’s how to get it live:

Step 1: Choose a hosting environment

• Cloud services: Platforms like AWS (Amazon Web Services), Google Cloud or Azure offer reliable and scalable servers that keep your bot running 24/7 without interruption.
• Dedicated servers: For maximum control and performance, consider using a dedicated server. This provides enhanced security and exclusive access to server resources.

Step 2: Secure your bot

• API key management: Store your exchange API (Application Programming Interface) keys securely using environment variables or secret management tools like AWS Secrets Manager. API keys allow your bot to interact with cryptocurrency exchanges.
• Encryption: Protect data exchanges between your bot and exchanges using HTTPS or SSL (Secure Sockets Layer) protocols to ensure information remains confidential.

Step 3: Connect to exchanges

• API integration: Link your bot to cryptocurrency exchanges (e.g., Binance, Coinbase) through their APIs. This enables your bot to execute trades and retrieve real-time market data automatically.
• Error handling: Implement error handling to manage issues like API rate limits or connection drops, ensuring your bot remains operational.

Step 4: Monitor and maintain

• Real-time monitoring: Use tools like Grafana to track your bot’s performance metrics, such as trade execution times and profitability.
• Alerts: Set up notifications for critical events (e.g., failed trades, significant losses) via Slack, Email or SMS to respond promptly to any issues.

Did you know? Historical trading data can go back decades. This means a bot is typically trained on massive market crashes and upswings, such as the Great Recession of 2008. 

Using a pre-built trading bot

If you’d rather use a pre-built trading bot and not go through the effort of creating your own, there are quite a few services available

Platforms like Coinrule and Pionex offer automated crypto trading with AI. They provide you with pre-built bots you can easily manage through rulesets and strategies. Unlike the create-from-scratch method, these platforms offer easy ways to switch up your applied rulesets so you can easily adjust your bot on the run.

Here’s how you can deploy your AI bot using this method:

Step 1: Set up your account

• API connection: Link your crypto exchange account to the platform using secure API keys provided by the service.
• Configure strategies: Customize your bot’s trading strategies using the platform’s user-friendly interface, often featuring drag-and-drop rule sets.

Step 2: Secure your setup

• API permissions: Grant only necessary permissions to your API keys (e.g., trading and reading data) to minimize security risks. Avoid granting withdrawal permissions.
• Two-factor authentication (2FA): Enable 2FA on both your exchange and trading bot accounts for added security.

Step 3: Launch and monitor

• Activate the bot: Start your bot with the desired settings using the platform’s dashboard.
• Continuous monitoring: Use the platform’s built-in tools to track your bot’s performance and make adjustments as needed.

Pre-built bots are definitely the most accessible way to get into crypto trading with a bot, but that accessibility comes at a cost. Literally! Crypto bot trading platforms will charge a cut of your profits, depending on how high those profits are. Typically, higher profits result in lower fees for you, as you’re making the platform more money overall. You scratch their back, they’ll scratch yours.

Did you know? Crypto trading bots don’t have emotions. Humans often trade based on emotions over logic, which can lead to critical mistakes. An AI bot can circumvent emotional blunders.

AI agents vs. crypto trading bots

You can also consider an AI agent — a more advanced form of software than the crypto trading bots described earlier. Unlike trading bots, which are typically trained on historical data and follow predefined strategies, AI agents can adapt and evolve over time, learning from new trends and market conditions.

AI agents have a broader scope and can perform a variety of functions beyond just trading. They can act as financial advisers or virtual assistants, providing insights and recommendations, and executing trades based on their continuous learning. While you can always override their suggestions, many traders rely on these agents for more informed decision-making and automation.

Some existing AI agents, such as Truth Terminal or Coinbase’s Based Agent, can go so far as to create marketing campaigns and deploy NFTs. The former even created a campaign around a popular memecoin, Goatseus Maximus (GOAT), skyrocketing its value.

As for Based Agent, you can use it to create your own AI agent in minutes. These agents have their own crypto wallets and access to the Coinbase API, providing them with a wealth of knowledge from inception.

Risks associated with using an AI bot for crypto trading

If you’ve been paying attention to technology over the past few years, you’re very aware of the risks of AI. AI is trained on human activity, and while AI is faster and more effective than humans, it’s not risk-free. Here are some risks of using a crypto trading bot:

• Always-on behaviour: While a 24/7 bot taking advantage of every opportunity sounds great, what if it makes a massive mistake while you’re asleep? You can make all the rules in the world, but managing your bot to mitigate losses is important. Trading tools like stop-loss can help manage losses.
• Security vulnerabilities: Bots are always online and often connected to one or more crypto exchanges. This constant connection leaves them vulnerable to hacks and theft.
• Failure to adapt: Crypto trading bots are trained on historical data. They may not automatically adjust to market changes or trading strategies without some manual tweaking. 

Despite the above risks, training an AI bot to day trade crypto presents an exciting opportunity for both experienced and novice traders. Whether you choose to build your own bot or use a pre-built service, AI bots offer the advantage of constant availability, speed and a logical approach to trading. 

Still, it’s crucial to be aware of their limitations and risks. With proper training, backtesting and strategy adjustments, AI bots can be a powerful tool in the crypto trading world.

Source: Cointelegraph