Developing trading bots is fun and you can get hooked pretty easily — at least I did. Especially if you are interested in the financial markets, stocks, crypto, trading and all finance related stuff like that.. 😅

I've been developing trading bots for some time and form my experience and what I've seen, I can safely say that there are people making good money with these bots. 💰

To be honest, I am not even sure if one needs that much knowledge to start running bots and making money. What one needs is

• trust & patience in the strategy
• validation through backtests
• consistent iteration over their knowledge and learnings
• emotions out the window

The Strategy We Will Be Developing For

Enough rambling, lets get into the strategy for which we'll be developing a trading bot 👇

1. We need to detect a trend in which to trade
2. We need to find the best prices at which to set the price, stop_loss and take_profit

For the 1st point, we will use the Exponential Moving Average (EMA) & for the 2nd point we'll use the Bollinger Bands 👇

The Strategy

To detect a trend, we will get a subset of candles, which are moving below or above the moving average.

• If they move above -> Uptrend📈 = LONG positions
• If they move below -> Downtrend📉 = SHORT positions

The amount of candles we will be looking at for these trends depends on the backtests we later do. Through them we can find the best amount of candles that provide the most stable results!

So, what's left is to define our ENTRY/EXIT positions. For that we will be using the Upper & Lower Bollinger Bands 👇

• 🔻 In a downtrend -> If the price closes above the Upper BBand, we place a SHORT position!
• 🔺 In an uptrend -> If the price closes below the Lower BBand, we place a LONG position/entry!

After the position is set, we still need to setSTOP_LOSS / TAKE_PROFIT prices. To do so, we use the following formulas 👇

• STOP_LOSS → N (Coefficient Param) * ATR (Average Through Range)
• TAKE_PROFIT → TPSL Ratio (Take-Profit:Stop-Loss Ratio - Coefficient) * STOP_LOSS

Both coefficients are what we'll be optimizing in order to get the most optimal strategy and best return! 💸 We will be running a optimization algorithm to find out which are the best numbers for these coefs. 🤖

Code Implementation

We've defined the strategy. Now we need to code it up. Backstest & Optimize It (Again via code)! 👨‍💻

1st Step: Download Data

import yfinance as yf
from datetime import datetime

symbol = "EURUSD=X"
start_date = "2023-01-01"
end_date = datetime.now().strftime('%Y-%m-%d')  # Today's date in 'YYYY-MM-DD' format
interval = "1h"
data = yf.download(symbol, start=start_date, end=end_date, interval=interval)
data.to_csv('EURUSD_1H_01.01.2023-Today.csv')

2nd Step: Convert CSV Data To Pandas DataFrame

import pandas as pd
import pandas_ta as ta

# Load data from a CSV file
df = pd.read_csv("EURUSD_1H_01.01.2023-Today.csv")

df['Datetime'] = pd.to_datetime(df['Datetime'], utc=True) 
df.set_index('Datetime', inplace=True)

# Remove any rows where the High and Low are the same (no price change)
df = df[df['High'] != df['Low']]

3rd Step: Calculate & Add Indicators To DataFrame

df["EMA"]=ta.ema(df.Close, length=30)
df['RSI']=ta.rsi(df.Close, length=10)
my_bbands = ta.bbands(df.Close, length=15, std=1.5)
df['ATR']=ta.atr(df.High, df.Low, df.Close, length=7)
df=df.join(my_bbands)
df # Check out the output 👇

Congrats! 🎉We've successfully downloaded and transformed 8141 rows of data into a pandas DataFrame!

4th Step: Define the EMA Signal

def ema_signal(df, current_candle, backcandles):
    df_slice = df.reset_index().copy()

    df_slice = df_slice.loc[current_candle-backcandles:current_candle, ["Open", "Close", "EMA"]]
    dnt = 0 if (df_slice[["Open", "Close"]].max(axis=1) >= df_slice["EMA"]).any() else 1
    upt = 0 if (df_slice[["Open", "Close"]].min(axis=1) <= df_slice["EMA"]).any() else 1

    if upt==1 and dnt==1:
        return 3
    elif upt==1:
        return 2
    elif dnt==1:
        return 1
    else:
        return 0

from tqdm import tqdm
tqdm.pandas()
df.reset_index(inplace=True)

It basically defines the EMA and then whether we have a given amount of consecutive candles, and based on that output 3 (in case we have both trends — shouldn't be happening ever — data is sus 🕵️), 2 (for an uptrend 📈), 1 (for a downtrend 📉) or 0 in all other scenarios.

5th Step: Define The Total Signal Based On The EMA Signal

from pandas import DataFrame

def total_signal(df: DataFrame, current_candle, backcandles):
    if (ema_signal(df, current_candle, backcandles)==2
        and df.Close[current_candle]<=df['BBL_15_1.5'][current_candle]
        #and df.RSI[current_candle]<60
        ):
            return 2
    if (ema_signal(df, current_candle, backcandles)==1
        and df.Close[current_candle]>=df['BBU_15_1.5'][current_candle]
        #and df.RSI[current_candle]>40
        ):
    
            return 1
    return 0

# To ensure teh DataFrame wasn't modified or being sliced before the progress apply
df = df.copy()

df['TotalSignal'] = df.progress_apply(lambda row: total_signal(df, row.name, 7), axis=1)

• We pass the current_candle & back_candles in order to test each candle
• We then use the ema_signal func we defined earlier to check is we are in an uptrend or downtrend
• Based on the signal, we check if the current_candle price has passed the respective Bollinger Band. And if yes, we return 1 (For SHORT Signal), 2 (For LONG Signal) or 0 (No Signal), depending on the trend!

After running this piece, you will get a progress bar like so 👇

Then you can add this line & check the generated signals for your first 10 candles 😲

df[df.TotalSignal != 0].head(10)

6th Step: Verify Your Signals Visually By Plotting The Results

import plotly.graph_objects as go

st=100
dfpl = df[st:st+350]
#dfpl.reset_index(inplace=True)
fig = go.Figure(data=[go.Candlestick(x=dfpl.index,
                open=dfpl['Open'],
                high=dfpl['High'],
                low=dfpl['Low'],
                close=dfpl['Close']),

                go.Scatter(x=dfpl.index, y=dfpl['BBL_15_1.5'], 
                           line=dict(color='green', width=1), 
                           name="BBL"),
                go.Scatter(x=dfpl.index, y=dfpl['BBU_15_1.5'], 
                           line=dict(color='green', width=1), 
                           name="BBU"),
                go.Scatter(x=dfpl.index, y=dfpl['EMA'], 
                           line=dict(color='black', width=1), 
                           name="EMA")           ])

fig.show()

And you'll get this graph, you can play with 📈

7th Step: Finally, Lets Define Our Strategy & Backtest

Firstly, create function that will invoke the TradeSignal from the DataFrame we've created:

def TOTAL_SIGNAL():
    return df.TotalSignal

Then create the Backtest, where the slcoef & TPSLRatio👇 are the coefficients we spoke about when defining the strategy above! You can modify them, re-runthe backtest and see which number gives the best results!

from backtesting import Strategy
from backtesting import Backtest

class MyStrat(Strategy):
    mysize = 0.99
    slcoef = 1.2 #1.3
    TPSLRatio = 2 # 1.8
    def init(self):
        super().init()
        self.signal1 = self.I(TOTAL_SIGNAL)

    def next(self):
        super().next()
        slatr = self.slcoef*self.data.ATR[-1]
        TPSLRatio = self.TPSLRatio

        if len(self.trades)>0:
            if self.trades[-1].is_long and self.data.RSI[-1]>=90:
                self.trades[-1].close()
            elif self.trades[-1].is_short and self.data.RSI[-1]<=10:
                self.trades[-1].close()
        
        if self.signal1==2 and len(self.trades)==0:
            sl1 = self.data.Close[-1] - slatr
            tp1 = self.data.Close[-1] + slatr*TPSLRatio
            self.buy(sl=sl1, tp=tp1, size=self.mysize)
        
        elif self.signal1==1 and len(self.trades)==0:         
            sl1 = self.data.Close[-1] + slatr
            tp1 = self.data.Close[-1] - slatr*TPSLRatio
            self.sell(sl=sl1, tp=tp1, size=self.mysize)

bt = Backtest(df, MyStrat, cash=250, margin=1/30, commission=0.00)
stats, heatmap = bt.optimize(slcoef=[i/10 for i in range(10, 21)],
                    TPSLRatio=[i/10 for i in range(10, 21)], 
                    maximize='Return [%]', max_tries=300,
                        random_state=0,
                        return_heatmap=True)

# To see the generated statistics
stats

# To check the strategy results
stats["_strategy"]

# This will run your backtest 
# & give you a plot, where each trade was placed in time
bt.run()
bt.plot()

You will see this backtest progress bar once you run this part of the script:

And after that's finished, you will get a view of your Backtest stats 🚀

Yo can play around, scroll though the different market times, view at what time a trade was placed and when it exited. It's honestly amazing to have such tools at our disposal!

As you can see on the bottom-right corner, the final performance of this strategy is 59% with max drawdown of 50% and peak of 105%!

Having such big of a drawdown isn't good to be honest, but for the sake of simplicity of this example it does the job. Also we've ran the backtests on a limited set of data, if we were to run on data from 20–30 years back, the results will be different - better IMO! 🚀

Advice On Backtesting & Coefficient Choice

Back to those coefficients we spoke about.. We can plot a heatmap, on which we can spot the most heated places in order to see which combination of slcoef & TPSLRatio will provide the most optimal results.

And based on that input, optimize our strategy! 🙏

import seaborn as sns
import matplotlib.pyplot as plt

# Convert multiindex series to dataframe
heatmap_df = heatmap.unstack()
plt.figure(figsize=(10, 8))
sns.heatmap(heatmap_df, annot=True, cmap='viridis', fmt='.0f')
plt.show()

What you want to be looking for here is the best value, surrounded by great values as well. This will ensure that when the market is changing you will still be in that zone of great values.. as opposed to moving to a bad zone!

👋 I hope this guide has illuminated the path to running a successful trading bot, complete with insights on backtesting and optimization.

If you have questions or need further clarification, don't hesitate to drop them in the comments below!

Enjoyed this read? Show some love with a clap 👏 and follow me for more insights at @ Konstantin Borimechkov

Let's keep the coding and trading spirits high! Happy trading and coding, everyone! 💚