What is a trading bot and how does it work?

May 21, 2025 | 8 min read

What is a trading bot?

A trading bot (or simply put: a trading robot) is a smart computer program that can automatically buy and sell for you on an exchange. Think of crypto, stocks, currencies, or commodities. So you don't have to constantly monitor the market yourself, the trading bot does that for you.

Such trading bots often use artificial intelligence (AI) and machine learning (ML). This means that the bot learns from its mistakes and becomes better at trading. The goal? To make more profit for you.

Example: Imagine you want to buy Bitcoin when the price drops and sell it when it rises. Instead of checking every minute to see if that moment has arrived, you set up a bot to do it for you automatically. You go to sleep, and the bot buys when the price is low and sells when it rises again. Nice and easy, right?

Many people use crypto trading bots precisely because they don't have the time or inclination to study the market. They think, “Let that smart robot take care of it for me; it makes fewer mistakes than I do.” And sometimes that's true. But beware: it's still investing, and a guaranteed way to get rich sounds too good to be true. And it often is. So be careful with these trading bots! You can lose your investment here too.

Key Takeaways

A trading bot trades automatically for you based on pre-set rules, often 24/7 and without emotion.
Not all bots use AI or learn on their own; only advanced bots do that, and they are rarely available to private investors.
You always run a risk, even with smart bots. You can lose your investment, especially in a volatile market.
Scammers are active in this world, so always do your research on the provider and only use reliable platforms.
Choose a strategy that suits you, such as grid trading, arbitrage, or momentum trading, and always test it first with backtesting or a demo account.

How does a crypto trading bot work?

Okay, now you know what a trading bot is, but how exactly does it work?

There are tons of different crypto trading bots, and they don't all work the same way. Some are easier to install than others. Some bots deliver higher returns (but also carry more risk). So it's a matter of finding what suits you best.

Before a bot can do anything for you, you need to give it access to your crypto account. You usually do this via a so-called API key. It sounds technical, but it's actually just a kind of digital key that allows the bot to trade on your account. This is, of course, where the danger lies: if a malicious bot gains access to your account, it can steal your cryptos. So always make sure you trust the party in question.

Example: You link your crypto account to a bot via an API key. Then you tell the bot: “Buy Ethereum when the price drops to €2,000 and sell when it rises to €2,200.” The bot automatically monitors that price and executes the orders as soon as that happens, without you having to do anything. This example is extremely simple, but you can develop entire day trading strategies within these trading bots.

Each bot works with a specific strategy. Some are cautious, others take more risks. The choice is yours.

More risk = chance of higher profits, but also chance of bigger losses.
Less risk = slower growth, but also less chance of bigger losses.

Please note: no matter how smart your bot is, there is always risk. So only invest money you can afford to lose.

Machine learning and artificial intelligence

Some trading bots are smart enough to learn on their own. We call this machine learning. The idea behind machine learning and AI is that these trading bots learn by making mistakes and improving themselves over time. How does this work? Simply put, the crypto bot remembers what happens during trading, sees which trades are closed positively, and also sees which ones are closed negatively. In this way, the bot collects information to improve the algorithm and thus becomes better and better.

Example: Suppose a bot buys bitcoin every time the price drops. In the beginning, it may do this a little too often, even if the price drops further afterwards. But when it notices that this often results in a loss, it learns from it and becomes more cautious.

That is why many creators of trading bots say that it is best to use them for the long term. In the first few weeks or months, the bot may not be very sharp. But over time, it learns what works and the chances of profit increase.

Do all trading bots use AI and machine learning?

No, most trading bots do not use AI or machine learning. They follow fixed rules and do not adapt automatically. Only advanced bots with self-learning algorithms actually become smarter over time.

Advanced bots are often created by large institutions or professional traders. They use AI to improve themselves based on data. Such bots analyze patterns, adapt their strategy, and become smarter as a result. However, they are usually not available to ordinary investors.

Why use a trading bot?

People may have different reasons for using a trading bot. These are the most common reasons:

People do not have the knowledge to trade themselves.
There is no time to do research and trade yourself.
Not everyone wants to spend all day doing it, so it's nice and easy.
It gives the feeling that someone is constantly behind the wheel, watching out for major price movements.
There is more confidence in the technical and analytical functioning of the trading bot than in one's own thinking and actions.

The advantages and disadvantages of a trading bot

The use of a trading bot has advantages, but there are also a number of disadvantages. Both the advantages and disadvantages of a trading bot are described below.

Advantages

A crypto trading bot can be suitable for someone who does not understand crypto but still wants to trade actively.
A trading bot does not trade based on emotion, which can greatly influence trading strategy.
Setting up a trading bot takes time, but then everything runs automatically.
Bots can trade multiple cryptocurrencies on different exchanges at the same time. This diversification helps to reduce risk.

Disadvantages

Scammers try to steal your crypto with illegal software. We recommend that you always research the party from which you want to purchase this service. Use reliable exchanges that are supervised by a central bank.
Most people do not understand crypto and trading bots, so it can be difficult to set one up or find a reliable party.
Even an AI trading bot can lose money. Even complex algorithms and the best AI bots are no guarantee of a positive outcome.
There are bad bots out there. Not every bot is smart or reliable, and some follow very simple rules that don't work in the long run.
Many bots are not free and charge a trading fee (or transaction costs), so this also costs money.

What should you look out for when choosing a trading bot?

Unfortunately, there are many scammers active in the world of trading bots. They build a bot that looks professional, but in reality it is a scam.

What happens then? You transfer money to the bot and your dashboard shows that you are making a profit. But as soon as you want to withdraw your profits, it turns out that this is not possible. Sometimes the scammers even let you withdraw your money, in the hope that you will then deposit more. This money is then, of course, stolen. In cases like this, there is often nothing you can do. The money is gone and you will never find the scammer.

Unfortunately, these practices are still common. There are plenty of people who have lost money this way.

How can you prevent this?

Only invest money you can afford to lose. Even with reliable bots, you can lose money, just like when trading on your own.
Always do your research. Look for reviews and experiences from other users. If you can't find anything about a bot, or if you only find complaints, stay away.

In short: be critical, don't fall for anything, and don't blindly trust a nice website or slick dashboard.

A few popular trading bot strategies

There are all kinds of ways that trading bots can trade automatically for you. Here are a few of the most well-known strategies:

Grid trading The bot buys and sells small amounts in a grid pattern. Suppose a coin is trading at $1. The bot buys at $0.98 and sells at $1.02. If the price goes to $1.05, the entire grid shifts, and it does the same thing again: buy at $1.03 and sell at $1.07.
Mean reversion The bot buys when the price is well below the average and sells when it is above it. Simply put: “buy low, sell high.” Very simple but widely used.
Arbitrage The bot buys a coin cheaply on one exchange and sells it slightly more expensively on another. That sounds like free money, but the profit is often small. Sam Bankman-Fried (former FTX CEO) built up a lot of capital this way.
Momentum trading The bot looks at, for example, the average (the moving average). Is the price below that average? Then buy. Is it well above it? Then sell. The idea is to move with the trend.
Technical analysis (TA) strategies Bots can work with all kinds of well-known indicators such as RSI, Bollinger Bands, Fibonacci, Ichimoku Cloud, volume, and price trends. Many bots even combine multiple signals simultaneously to make decisions.
Ready-made bots or build your own You can choose pre-set bots (from well-known platforms) or set up your own strategy. Often, you can set exactly what the bot should do, when, and with what amount.
Backtesting Before you start with real money, you can test the bot on old market data. This allows you to see if your strategy would have worked in the past. Useful for assessing risks.
HODL bots These are the simplest bots: they buy a coin and then do nothing else. You hold on to your crypto, regardless of what the market does. Nice and cheap, but of course you can also just do this yourself.

Conclusion

Trading bots can be useful for people who want to trade automatically without having to spend all day on it. They take work off your hands, trade without emotions, and can be on 24/7.

But be careful: not every bot is smart, reliable, or profitable. The market remains unpredictable, and even a robot can make mistakes or be hacked. There are also many scammers active in this industry. So always be careful before you start using a trading bot, and always do your own research! Don't just trust nice promises and only invest money you can afford to lose.

Always remember: A trading bot is not a magic money machine, but it can sometimes be a useful tool.

What is a trading bot and how does it work?