On Bots, And Their Effects On The Markets

[amagra11]

With more and more bots trading stocks and crypto, I believe it is time to examine the likely effects of this increase.  This is what is public knowledge about bots: they understand the outcomes of human emotion, but they do not feel it.  With bots, it is not fear/greed.  It is expectation of outcome.

Therefore, when they expect a stock or crypto will rise, they buy.  When they expect it will fall, they sell.  The timing depends entirely on the parameters they rely on.  Current news?  Institutional buy signals?  Ceiling/floor?  How about when the floor rises but the ceiling does not, an indication that the stock or crypto will explode?  Do bots use that parameter?  I am sure some do.  If a particular bot does, it will buy exactly when the ceiling and floor converge.  All the bots who follow that crypto and know that signal will, and at the same instant.  If bad news comes out, bots will sell all at once, and the stock or crypto will crash.  Because those particular bots are following the stock or crypto 24/7 (don’t need to eat or sleep or check other crypto charts or work), because there are so many bots now, and because they can calculate the exact millisecond when the floor and ceiling converge, or act the exact millisecond the bad news comes out, it will happen all at once, and explosively.  For growth, and crashes.

Another outcome: the chart signals bots follow will signify what the human bot-builders expect them to, not just because they are systematic signals, but because the bots’ actions will cause them to.  When the floor is rising and the ceiling and floor converge, the stock or crypto WILL rise, because bots, who expect it to rise, will buy in. 

What, then, can we expect?  More predictable movements, even just based on charts, but also explosive growth and damning falls.  Essentially, an amplification of volatility.  That is what we can expect from stocks, and what we can expect from crypto. 

As more bots trade, a crypto, ANY crypto, faces the danger of falling to zero at a particularly bad piece of news.  And portfolios that hold untethered crypto will change so much it will give holders headaches.  You might be worth five million today and ten million tomorrow and one million the day after that.
 
The question then arises:  Is this what we want?  Do we want more predictable movements, but at the same time increased volatility?   Do we want wild swings, and the possibility of falling to zero?   If we do not, do we want to ban bots?  And, with the possibility of bots hosted on outside platforms and simply hooked up to exchanges, the question becomes, can we ban them?

If not, if bots increase, it will become easier to time movements of stocks and crypto based on chart patterns.  Even for human traders.  At the same time, the increased volatility of individual stocks and crypto will make diversification a necessity, even for institutions.  If you do not diversify, the volatility will make frequent allocation adjustments a necessity.  Mor HODLers will become, for all intents and purposes, week or day traders.  And there will be less time for hugging your kids.

Unless, that is, you use a bot.

[ElvorAI]

I think bots increase both efficiency and volatility.

On one hand, they remove emotional decisions and can react to market information much faster than humans. On the other hand, when many bots follow similar signals or strategies, they can amplify price movements and create sudden spikes or crashes.

The real difference is not whether a trader uses a bot or not, but how the bot manages risk. A poorly designed bot can lose money just as quickly as an emotional human trader. Good risk management and adaptability are still more important than speed.

[amagra11]

I think bots increase both efficiency and volatility.

On one hand, they remove emotional decisions and can react to market information much faster than humans. On the other hand, when many bots follow similar signals or strategies, they can amplify price movements and create sudden spikes or crashes.

The real difference is not whether a trader uses a bot or not, but how the bot manages risk. A poorly designed bot can lose money just as quickly as an emotional human trader. Good risk management and adaptability are still more important than speed.

Thanks so much for replying! I agree with you on all points except one.  I agree, bots remove emotional decisions, and can react to market information much faster than we can.  That is a good point.  But doesn't that make speed more important?  If a stock rises and falls quickly based on the market, you have to be able to catch it rising and falling to make money.  If you buy in too late, it will have already risen all it is going to, and will start to fall, and you will lose money. 

But yes, I think you are also right about poorly designed bots, and I think that's a real danger.  If someone "buys" a bot at a discount, they could receive something that will lose money, just as a too-emotional human trader will.

Thanks again for your input!

[zasad@]

I've seen several bots, but they don't make decisions during trading; they follow a programmed strategy. If a trader chooses the wrong strategy, it's not the bot's fault.
If your bot is programmed to profit from market volatility, and the price fluctuates or falls sharply, you'll suffer a loss. But since the exchange sees all of the trader's positions, it's like playing against a cheater with open cards.

[Darker45]

It's easy to conclude from your premise that the movements would eventually grow more and more predictable. Would it turn me into a trader? I don't think so.

In reality, it's easier said than done. If the US bombs Iran tomorrow, the immediate expectation is that the market would go down. Will it? By how much? Until when? If Russia and Ukraine agree to stop the war in Europe, the assumption is that the market would rise. Will it?

In the end, timing the market isn't easy despite general observations that Bitcoin follows macro-economic trends, that it correlates with tech stocks, that it reacts this way and that to changes in interest rates, and so on and so forth.

Trading remains hard and, I believe, most often not profitable, whereas hodling is almost a guarantee that you'd be rewarded in the end.

[amagra11]

It's easy to conclude from your premise that the movements would eventually grow more and more predictable. Would it turn me into a trader? I don't think so.

In reality, it's easier said than done. If the US bombs Iran tomorrow, the immediate expectation is that the market would go down. Will it? By how much? Until when? If Russia and Ukraine agree to stop the war in Europe, the assumption is that the market would rise. Will it?

In the end, timing the market isn't easy despite general observations that Bitcoin follows macro-economic trends, that it correlates with tech stocks, that it reacts this way and that to changes in interest rates, and so on and so forth.

Trading remains hard and, I believe, most often not profitable, whereas hodling is almost a guarantee that you'd be rewarded in the end.

That's probably true about what's happening in the news.  But I think the charts themselves are more likely to follow the patterns traders already think they do, because some bots will trade just from the charts, not from world events, causing the very patterns they expect.  The bots expect the crypto to rise based on the chart, so they buy in, so it rises.  The bots expect a crypto to fall based on the chart, they sell, so it falls.  In that way, the charts will grow more predictable.  But you have a point--it's hard to predict what cryptos and even stocks will do based on real-world events.  The thing is, some bots ignore world events completely, and just look at the charts, and it's those bots that will expect and cause more "predictable" outcomes in the charts.