Core Concepts

• Algorithmic Trading: Using a set of programmed rules (an “algorithm”) to execute trades automatically.
• Bot: A software program that follows your algorithm 24/7, placing orders without manual input.
• Strategy: The logic or ruleset your bot uses to decide when to buy or sell (e.g., moving-average crossover).
• Latency: The time delay between sending an order and the exchange receiving it—lower latency means faster execution.
• Throughput: Number of orders or messages a bot/exchange can process per second.

️ Bot Components

• API (Application Programming Interface): A set of functions provided by an exchange that lets your bot fetch data and place orders.
• Websocket: A real-time data stream connection (e.g., live price feeds), faster than periodic polling via REST.
• REST API: A method to request data or send orders in discrete HTTP calls (e.g., “getTicker()” or “placeOrder()”).
• Order Management System (OMS): The module that handles order creation, modification, cancellation, and tracking.
• Execution Engine: The part of your bot that decides exactly when and how to submit orders based on signals.

Strategy Types

• Trend-Following: Bots that open positions in the direction of the prevailing trend (e.g., breakout strategies).
• Mean Reversion: Betting that price will “snap back” to an average after deviating too far (e.g., RSI-based entries).
• Arbitrage: Taking advantage of price discrepancies across exchanges or instruments (e.g., triangle arbitrage).
• Market Making: Placing simultaneous buy and sell limit orders around the midpoint to capture spread.
• Grid Trading: Laying out a grid of buy and sell orders at fixed price intervals—profits on oscillations.

🧪 Development & Testing

• Backtest: Running your strategy on historical data to see how it would have performed.
• Paper Trading: Executing your bot in a simulated environment with fake funds to validate live behavior.
• Live Trading: Running your bot with real funds on the exchange.
• Walk-Forward Analysis: Continuously re-optimizing and testing strategies on rolling data windows to avoid overfitting.
• Metrics:
  • Sharpe Ratio: Return per unit of volatility—higher is better.
  • Max Drawdown: The largest peak-to-trough loss—critical for risk assessment.
  • Win/Loss Ratio: Number of winning trades divided by losing trades.

Risk & Operations

• Position Sizing: Determining how much capital each trade uses—often a fixed percentage of your total equity.
• Stop Loss / Take Profit: Pre-set price levels where the bot will automatically exit to cap losses or lock in gains.
• Circuit Breaker: A safety mechanism to pause or halt trading if unusual conditions occur (e.g., sudden crash).
• Failover / Redundancy: Backup systems or connections to ensure the bot stays online if the primary fails.
• Monitoring & Alerts: Real-time notifications (e.g., SMS, email, Discord) when certain bot conditions trigger (errors, fills, disconnects).

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