How to Choose, Set Up, and Customize a Market Making Bot

With a trading bot, you have the flexibility to execute trading strategies automatically 24 hours a day, 7 days a week. These algorithm-based crypto market making bots have grown into a major tool for traders, but you may find the prospect of using them daunting as a newcomer.

This guide is designed to help you choose a bot, set it up, and customize it, so you’ll be ready to start buying and selling cryptocurrencies!

Crypto Market Making Bots Defined

First, let’s define “market making”. This term refers to traders buying and selling coins to gain a return on the variation between bid and offer rates. So, for instance, if an asset trades at $200 mid-price, market makers could buy at $199.90 and sell at $200.10 for 20,000 shares.

Now, should the market move up and an investor purchases 20,000 shares at $200.10 and someone sells at $199.90 when the market moves down, the market maker will gain a profit of $4,000 ($0.20 x 20,000). A wise market maker does this continuously to build a considerable ROI.

In the case of digital assets, market makers tend to be professional traders, hedge funds, and — of course — crypto trading bots. These are responsible for a rising number of daily orders.

How do they work? Here’s an example. You might customize your crypto trading bot to purchase and sell Bitcoin against Tether at 0.15% away from mid-price, allowing for $10,000 on either side. As a result, you could take advantage of the variation between bid and offer prices as the value goes up or down.

Choosing a Market Making Bot

You should consider the following factors when looking for a crypto trading bot suitable for market making:

  1. Security: Be wary of trading bots which have suffered security breaches or lack basic features

  2. Reputation: Look at honest reviews from other users across social media to determine if the bot is a safe, smart choice

  3. Price: When a crypto trading bot’s price is beyond your current capital, it’s unlikely to be a worthwhile investment for you; opt for a bot that aligns with your budget limits better (such as one that’s open source and free)

  4. Features: Generally, trading bots with lots of features are best — you may want to take care if a potential bot lacks stop-loss orders or a user-friendly UI

  5. Customization: You should be able to customize your market making bot extensively, tweaking settings to execute your strategy effectively

Setting up and Customizing Your Crypto Market Making Bot

The process of setting up and customizing your bot varies, but you’ll still follow the below steps regardless of your software:

Signing up

You’ll need to register and create an account after you choose the right trading software for you. While some bots involve a subscription fee, some are free. You may be required to download software, though web-based alternatives are available too. Think about what suits you best.

Picking your currency pair

Next, you have to select a currency pair that you want your bot to make markets for. Choose a liquid pair which allows you to trade on a larger scale, giving you a better chance to earn better income.

The most likely pairs include BTC/USDT or ETH/USDT, given that Bitcoin and Ether are two of the most popular cryptocurrencies available. But if you’re operating on less capital, you may make markets in coins with less liquidity.

Choose your aggressiveness

Though this may seem odd, you need to determine your bot’s aggressiveness. This applies to how closely to the mid-price your bot should execute buy and sell orders.

For example, if you aim to be counted among Poloniex’s strongest BTC/USDC bids and offers, your bot would have to be customized to set orders at 0.1% from the common mid-price. This aggressiveness level would help you to generate a lot of trades and earn small profits on all successful transactions.

Be smart with managing risks

Risk management measures are a key part of any trading bot software, including stop-loss limits and other automatic precautions designed to prevent you suffering substantial losses when prices drop or rise.

Pay attention to risk management when putting market making bots in action, as sharp movements in the market could cost you money.

Backtesting

The majority of crypto trading bots incorporate a backtesting feature. With this, you have the freedom to test your trading strategy based on historical values and determine how successfully your bot would have performed at that point. Regular backtesting and refinement increases its performance in live markets.

Live testing

No matter if your bot includes a backtesting feature or not, it’s always best to run live tests when you have bots set up. This is the only way to identify if your bot can be profitable, so live test your bot with a little portion of capital to keep possible losses to a minimum.

Capitalize your crypto trading bot

Feel satisfied with your market making bot performance throughout your tests? Now, it’s time to capitalize on it and watch it execute orders that lead to a solid trading profit.

Bear in mind: the profit that these bots can make is equal to the profit per transaction multiplied by volume traded. So, you can expect to make more money on larger trades.

But all order sizes must be relative to the currency pair’s liquidity. This ensures both sides of your trades will be filled.

Try your bot for real

Next, you should take your bot live and assess how it performs in the real world of trading.

Monitor your bot

Last but not least, track the performance of your bot: don’t be complacent and expect it to bring money rolling in without monitoring it. Keep checking in with the bot to assess how it performs, and to see if you should customize its settings further.

This guide should have inspired and prepared you to put your own market making bot in action. Follow the tips above to get started with less wasted time and (hopefully) fewer mistakes.