Everything You Need To Know About Crypto Algo Trading
Computerized algorithms are everywhere and have been a part of the trading and investment world since the 70s.
Investment robots run the stock markets, managing quantitative funds. Because of the trading prowess of algo trading bots, passive and quantitative investment funds occupy 60 percent of all equity assets. Human traders only run 10 percent of these trade processes.
Unlike stocks and commodities markets, the nascent crypto-assets markets are still in their formative stages. Digital currencies exhibit extreme volatility meaning that they have soaring highs and extreme lows. There are profits in them to be made, beyond mining and HODLing. In the past, all a crypto enthusiast needed to do was to gain huge mining machines for passive mining income.
Today, mining difficulty has increased and the costs of the practice nearly outweigh its returns for the average crypto fan. Consequently, the extreme price volatility in these assets has now become a second gold mine, creating a vast crypto assets trading niche that does the very opposite of HODLing. Crypto traders take advantage of both bearish and bullish signals to capitalize on price volatility.
They will buy low and sell high in all directions, making a neat profit as long as they can accurately predict short- and long-term price patterns via sentimental and technical analysis. They also have to create robust trading strategies that rise above emotionally driven trading that leads to poor trading decisions. Over time, these traders have embraced algo trading for its ability to speed up complex decision making in crypto asset trading.
What is Crypto Algorithmic (Algo) Trading?
Algorithmic trading, also known as algo trading, is the automation of crypto trading and related processes. It computerized order flows and brought returns at superhuman speeds.
Some crypto traders refer to this process as high-frequency trading (HFT), because of its speed of light trading feature. This level of trading speed is one reason traders seek the help of trading algorithms and bots.
Cryptocurrency algorithmic trading combines pre-configured strategies, computer hardware, and complex calculations to create and start high-speed crypto asset trading. An algorithm is a set of instructions or processes that performs a certain task.
The Benefits of Crypto Algo Trading
Successful crypto trading depends on the quality of a trader's analysis.
High-quality trading analysis can bring by perfect buy or sell opportunity in crypto trading. A good trader has to analyze crypto news, charts, and quotes to stay on top of all trading signals.
They also have to fill in their order details at the most opportune of times and monitor all their trades for targets gained or for trades countering their strategy.
A winning trader also has to close positions to book profit or cut losses on time. This is the day-to-day rinse and repeat cycle of successful crypto trading.
A winning strategy has to be followed religiously to deliver consistent wins and to create opportunities for optimization. This process does not make any room for approximations, or emotional decisions that lead to early trade cancellations or the premature booking of profits.
The winning trader has to be in charge of their emotions and follow their strategy religiously. When they have accomplished this superhuman feat, they also need to tweak and backtest their strategy because the market is continuously mutating. Yesterday's winning strategy might be in the losing end tomorrow if it lacks continuous improvement and diversification.
This is a tall order for any human trader prone to miscalculations and poor lack of judgment because of the various emotions that rise in the extreme crypto trading environment. These shortcomings of the human trader have made room for algorithmic trading.
With a trading bot in charge, the trader will enjoy benefits such as;
- Human emotions free trading, which are unencumbered by negative reactions such as fear, greed, and FOMO.
- Accuracy and speed in operations such as order filling that can cost a trader enormous opportunities for profits if done incorrectly. Trading bots can execute trades in milliseconds, taking advantage of minute movements in prices within a period.
- Trading bots eliminate the stress of trading by taking on complex decision-making and by maintaining trades at all hours of the trade
- Highly scalable crypto algo trading that can run multiple strategies simultaneously as required
How to Algo Trade Cryptocurrencies
Stock and commodities markets algo trading bots are proprietary software whose permissions and historical data can cost a tiny fortune.
The barrier of entry in crypto assets trading is significantly lower because most crypto exchanges have an open API for trader use. A tech-savvy trader with Python, R, or C++ programming languages knowledge can quickly rig up a trading bot and execute algo trading fast.
New generation crypto CFD brokers like CryptoAltum offer its traders the MT5 platform that has a wide array of technical indicators and trading bots called Expert Advisors (EAs). EAs automatically execute trades and run other account operations while technical indicators are integrated to pick out trade signals depending on the trader’s laid out strategy.
These two components make a wholesome automated trading process in crypto algo trading. There are, however, diverse Expert Advisors in the marketplace, but the MQL5 environment has the largest scripts, custom, and inbuilt indicators, and trading bots libraries out there.
The common elements of an algo trading bot are:
Accuracy in trading is highly reliant on fresh data insights. Trading algorithms need such data for their system mechanics. Structured trading data is supplied in the form of CSV files, spreadsheets, or JSON files to the bot.
They will also mine unstructured market-related information from aggregated news, videos, audios, and social media feedback for more trading information.
These bots also need market insights such as trade volumes, and end of the day prices from various crypto exchanges and trading platforms for intelligence.
2. Algo Model
A financial model is the underlying structure of any algo trading bot. The model forms the algorithm of trade inferring market dynamics to the bot, a feature that guides the computer's decision-making process.
The algorithmic systems have inbuilt trigger points that ensure that all predefined parameters are executed when all requirements of a process are met.
The data-driven process of algo bots has the advantage of superior monitoring features. This allows for the continuous enhancement and improvement of the system and trading strategies.
Various Crypto Algorithmic Trading Opportunities
Since algorithmic trading bots are not fallible to human emotions and execute as per predetermined rules, they are perfect traders for the digital assets trading sector. Some primary strategies used to trade with algo bots include;
- Momentum Trading/ Technical Analysis
In momentum trading, the crypto trading bot follows the current price trends. The bot is influenced by the hypothesis that as per historical data, a predominant trend will continue until its signals show an end. It will, therefore, buy at the dip or short the trade. This trading process often has trend reversals or fast changes in patterns, so the trader should be careful to lock in profits and to only buy at safe levels.
- Mean Reversion
Mean reversion refers to the hypothesis that an asset's price always slides back to a historical average price. When there are extreme deviations to this hypothesis, the market is simply overbought and there should be a reversal.
Deviations, therefore, are short-lived and the trading bot will set its orders accordingly. A mean reversion algorithm that does not have fundamental analysis support could cause massive losses when prices crash with little hope of future recovery.
In arbitrage, the algo trading bot exploits price differences of an asset across diverse trading platforms. It will, therefore, sell and buy crypto assets across these exchanges and enjoy the diverse price differences.
- Market Making
Most crypto exchanges have makers and takers that pay non-identical transaction charges. The maker will trade free or earn rebates because they accept guaranteed buy or sell orders. The makers on the other hand execute sell order specific prices for the takers. This process creates a lot of liquidity while profit is made from the platform's bid-ask spreads.
Via the popular MT5 trading platform, CryptoAltum supports high-tech crypto algo trading with the best market prices. It gets more interesting: CryptoAltum offers free and secure Virtual Private Server (VPS) to clients if they make a minimum deposit and clear a minimum monthly trading volume of 20 standard lots when trading crypto.
This means algo traders can continue even when there are power outages, an advantage especially when trading bots need not be constantly monitored.
CryptoAltum also guarantees a 100 percent execution rate with deep liquidity and industry’s lowest spreads, meaning chances of remaining green regardless of volatility is elevated.
At CryptoAltum you can have as many as 200 open trades so long as your exposure is within the $1,000,000 limit.
Crypto trading will be futile if a trader goes about his/her business without a tested strategy. It will even be catastrophic and draining especially if a crypto trading robot is blindly deployed in a live account without highsight. Our next guide explains five of the most common crypto trading algorithm strategies.