In plain language
A trading bot is software that automates one or more actions: reading a signal, constructing an order, sending it, amending it, or closing it under defined instructions.
Signal, transport, and execution
The bot may calculate the decision or receive it from a strategy or signal provider. A webhook may carry the message; a broker or exchange then decides whether to accept the order. Signal sent, order accepted, and fill are separate events.
Automation is not edge
A bot can execute a bad rule quickly. It is not necessarily AI, does not necessarily hold funds, and does not remove slippage, latency, bugs, bad data, or disconnections. A trading bot does not guarantee profit and cannot predict sudden market changes.
Operational controls
Useful controls include a test environment, size and loss limits, minimum API permissions, unique identifiers, order-to-fill reconciliation, alerts, and manual shutdown. Monitoring continues after release because code, parameters, markets, and infrastructure can change.
Sources
- CFTC, AI Won't Turn Trading Bots into Money Machines — Explains that bots and AI do not guarantee returns or predict the future.
- U.S. SEC, Robo-Advisers — IM Guidance Update 2017-02 — Calls for development, testing, backtesting, and post-implementation monitoring of algorithmic code.
- FINRA, Know the Risks of Auto-Trading Services Offered by Unregistered Entities — Describes provider, account-access, and automated-transaction risks.